CT Applicability on Branches of Foreign and UAE Companies
The United Arab Emirates (UAE), known as a premier financial center, has embarked on a significant fiscal reform journey by introducing a new federal corporate tax (CT) system, effective June 2023. This new tax system has far-reaching implications for businesses operating in the UAE, including branches of foreign and UAE-based companies. The application of corporate tax uniformly covers all revenue streams and other net income that has been disclosed in the financial documents of companies; however, the rate for businesses with net profits under 375,000 AED will be 0%, while it will be 9% for businesses whose profits exceed 375,000 AED. In this blog, we will understand the applicability of CT, shedding light on the key aspects to help businesses navigate the new tax landscape effectively.
Corporate Tax Liability for Branches of Foreign and UAE Companies
When a branch of a company in UAE has a Permanent Establishment (PE) in a foreign country, its profits will be subject to corporate tax in UAE or an equivalent tax in the foreign country. As a branch is not a separate legal entity but an extension of its parent entity, separate financial statements need not be prepared for such organizations in the UAE as most of the transactions done by the branch would be transactions of the parent company itself. This perception of branches as extensions of a parent company for tax purposes also eliminates the need for their separate CT registration. Both foreign and UAE companies are, thus, required to file a single corporate tax return that includes the transactions of all their branches.
Foreign companies that have any kind of permanent establishment in UAE will be subject to the CT regime, unless they qualify for any exemptions or reliefs under the law. The income earned by such branches through any of the businesses or business activities in UAE would attract corporate tax.
You can also read: Corporate Tax: Foreign Companies That Have PE in UAE
This generally creates complexity in determining the individual financial obligations of the branches of foreign and UAE companies, leading to confusion about whether these entities will be taxed under the UAE CT Law. The answer to this query is that branches of foreign companies and UAE companies will be subject to CT (unless they qualify for the free zone tax incentives or other exemptions).
Tax Treatment for Branches of UAE Companies
Corporate tax obligations for branches of foreign companies and UAE companies are entirely based on the laws and tax regulations applicable in the jurisdiction in which the head office of the company exists. Since the UAE corporate tax regime recognizes the complexities associated with attributing income and expenses to foreign branches, businesses can use any of the following two ways to handle their CT liabilities for foreign branches of UAE companies.
Claim an Exemption for Branch Profits
To prevent businesses from double taxation, the regime of corporate tax in the UAE suggests the option of claiming a branch profit exemption that will apply to all branches of UAE companies. It is essential to note that a branch profit exemption is irrevocable. However, this exemption can’t be claimed if the branch of the foreign or UAE company is not subject to a sufficient level of tax in the jurisdiction in which it operates.
Claim a Foreign Tax Credit for Taxes paid by the Branch in the Foreign Country
If a UAE company has a branch in another country, they can request a tax credit for the amount of tax paid in that specific foreign jurisdiction, which can be used to offset their UAE corporate tax liability. This provision helps prevent double taxation and is called a Foreign Tax Credit. The maximum foreign tax credit a company can receive will be the lower of:
- The tax amount paid in the foreign country; or
- The UAE CT amount payable on the foreign-sourced income
It is important to remember that any unused Foreign Tax Credit will not be carried forward or back to other tax periods. Furthermore, the Federal Tax Authority (FTA) will not provide a refund for any unutilized Foreign Tax Credit.
You can also read: Transfer Pricing Documentation Under Corporate Tax
The new UAE corporate tax system applies to various types of entities, including foreign companies with branches in the UAE and UAE companies with branches in foreign jurisdictions. This tax regime is designed to be business-friendly, with a moderate tax rate of 9% applied to business profits exceeding AED 375,000 (approximately USD 100,000). However, businesses need to stay updated on the evolving regulations to ensure full compliance with the UAE CT Law.
CDA as Your Tax Consultant
As businesses adapt to this new tax environment, seeking advice from tax experts like CDA and staying updated on regulatory changes will be paramount to maintaining their financial stability and ensuring legal compliance. So quit hesitating - reach out to the CDA tax experts and take advantage of our One Hour FREE CONSULTATION right away.