Have you heard about advance tax or tax deductions at the source of income? It is a withholding tax. Withholding tax is a crucial component of the UAE’s corporate tax system that often mystifies business owners and financial professionals. Whether you are a multinational corporation or a local business, understanding withholding tax is essential for tax compliance and planning. Withholding tax, commonly known as WHT, is the tax that is levied at the source of income and paid to the tax authorities. In this blog, we will explore withholding tax essentials in light of UAE corporate tax law (Federal Decree-Law No. 47 of 2022).
What is Withholding Tax?
Withholding tax (WHT) applies to the source of income. The primary responsibility for its deduction and payment to the tax authorities lies with the payer. The payer must calculate the WHT correctly and remit it accordingly. If we look at WHT from the UAE corporate tax perspective, WHT applies to various incomes. This includes dividends, royalties, interest, and other incomes. WHT exists in many countries across the globe however, it usually applies to cross-border payments.
Withholding Tax Essentials under UAE Corporate Tax
As per Article 45 of the corporate tax law, the current WHT rate in the UAE is 0% for the following incomes. However, the rate can differ depending on the Cabinet Decision at the suggestion of the Minister.
a) The state-sourced incomes earned by a non-resident. However, this income should not be attributable to the UAE permanent establishment of a non-resident.
b) Any other income suggested in the Cabinet Decision by the Minister
If there is any WHT, it should be taken off the gross amount of the payment and must be paid directly to the Authority within the time limit as specified by the Authority.
What Determines Whether the Income is State-sourced?
Article 13 of the corporate tax law provides information on the circumstances that determine UAE-sourced income. Income is state-sourced in the following situations:
a) Income earned from a UAE resident.
b) When income is earned from a non-resident in a condition where this income is linked to a permanent establishment in the State of that non-resident person.
c) In cases where it originates from activities conducted, assets situated, investments made, rights utilized, or services provided or enjoyed within the State.
Furthermore, the law also provides a non-exhaustive list of UAE-sourced incomes that are without any limitations. These include:
a) Income earned from the sale of goods in the UAE.
b) Income earned from the provision of services in the State.
c) Income earned from the contract that is wholly or partly performed or benefitted from the UAE.
d) Property Income from the State.
e) Sale of shares of a resident person.
f) Income from intangible assets, including intellectual property, from the State.
g) Interest income, is subject to conditions.
h) Insurance income, is subject to conditions.
Withholding Tax Credit:
As per Article 46 of the corporate tax law, there can be a withholding tax credit that can reduce the tax liability.
1) If a person becomes taxable in the tax year, they can reduce the amount of their tax liability by withholding tax credit.
2) The withholding tax credit is the lower of:
a) Withholding tax deducted under Article 45 or
b) Corporate tax liability due
3) If there is any withholding tax credit left for a tax period, the Authority shall refund it under Article 49.
Foreign Tax Credit:
Article 47 provides guidance on the foreign tax credit.
1) A foreign tax credit reduces the corporate tax liability in a relevant tax period.
2) It is worth noting that the foreign tax credit cannot be higher than the corporate tax liability for a relevant income.
3) If there is any foreign tax credit that is unused, it cannot be carried back to previous tax years or carried forward to future tax periods.
4) The taxable person must maintain all the documents in support of the foreign tax credit.
In conclusion, understanding withholding tax (WHT) within the framework of the UAE’s corporate tax system is pivotal for businesses. This blog has revealed the core concepts of WHT, its application to various income categories, and its relevance in international transactions. Furthermore, we’ve discussed the determinants of “state-sourced income” and the potential benefits of tax credits. The current WHT rate in the UAE is 0%; however, a Cabinet Decision can change the current WHT rate. A firm grasp of withholding tax essentials is necessary for businesses to ensure tax compliance and optimize their financial strategies.
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