Application of Tax Credits
As a corporate powerhouse, the United Arab Emirates has been quickly changing its tax system to bolster its economic expansion. The UAE hopes to maintain its status as a tax-friendly destination while simultaneously achieving its developmental objectives with the implementation of the new corporate tax framework. All companies doing business in the UAE as of June 2023 are required to pay corporation tax on their profits, including any income earned abroad that may have previously been subject to a tax equal to CT by another nation.
Here is where tax credits come into play as a powerful tool for encouraging investment and growth. They guarantee that income taxes are paid equally across national borders while preventing or reducing double taxation of enterprises that generate the income. This blog post will discuss how tax credits are used in the United Arab Emirates and how they might help companies by lowering their risk of double taxation.
Double Taxation
To tax the same income twice is to practice double taxation. Based on the business’s residency, a specific amount of income may be taxed in the United Arab Emirates; additionally, the taxpayer’s home country may tax the same amount of income in accordance with its domestic rules.
Different Kinds of Double Taxation
• Double taxation by law
Double taxation happens when an individual is subject to taxation on the same income by multiple countries due to differences in their legal systems.
• Double taxation on the economy
Economic double taxation, sometimes known as “judicial double taxation,” occurs when the same income-generating activities or transactions are taxed in two or more states but by separate people or organizations.
Tax Credit
Through subsidiaries or branches, numerous corporate companies based in the United Arab Emirates operate in multiple jurisdictions. These companies are typically taxed on their profits in both the UAE and the foreign country when they establish foreign branches because they are seen as having a permanent presence there. The new corporate tax system in the United Arab Emirates enables companies to claim a “Foreign Tax Credit” for taxes they have already paid in another nation, thereby preventing double taxation. However, whichever is lower—the tax paid in the foreign nation or the corporation tax due in the United Arab Emirates on the foreign income—determines the maximum amount of Foreign Tax Credit that a business may claim.
As a case study, consider the multinational corporation XYZ, which is headquartered in the United Arab Emirates and makes money from activities in the US and China. Corporate tax is levied by the UAE on all of the company’s earnings, including money it receives from the US and China. However, corporation taxes, or similar taxes, are also levied by the US and China on money made by businesses within their borders. Double taxation is the term used to describe the circumstance in which XYZ must pay taxes twice on the same income.
In order to avoid this, XYZ is able to claim a credit for taxes paid in foreign jurisdictions (such as the US or China) thanks to the Foreign Tax Credit provided by the UAE tax system. Put more simply, XYZ is entitled to a reimbursement for the taxes it paid overseas. The total amount of Foreign Tax Credit that can be claimed is limited, nevertheless. Due to revenue from overseas sources, the tax credit will be the amount that is less than the corporate tax in the UAE or the tax paid in the foreign country.
For instance, the highest Foreign Tax Credit that XYZ is eligible to claim is $11 million if it pays $12 million in taxes in the US and $9 million in taxes in China, but only $11 million in corporation tax is owed in the UAE.
Furthermore, the taxpayer needs to keep all pertinent records up to date in order to claim a Foreign Tax Credit. It’s also crucial to remember that the FTA does not allow any unused foreign tax credits to be carried over or reversed for use in a later tax year. Thus, tax credits ensure that the tax system is equitable for all parties while also fostering global corporate activity.
To Sum Up
The tax system of the United Arab Emirates seeks to encourage investment and economic expansion. Therefore, tax credits are essential in assisting firms in optimizing their tax status. Businesses operating in the UAE, especially those with a Permanent Establishment in a foreign jurisdiction, must comprehend how these tax advantages are applied.
IBR GROUP serving as your Tax Advisor
In order to properly navigate the current tax environment, firms need consult with tax professionals such as IBR GROUP. Our tax professionals will help you maximize your financial gains while fulfilling your tax duties and removing any potential hazards. With a tailored approach, our professionals can provide you with first-rate accounting, auditing, and tax advisory services. As a result, you can grow your company to new heights and succeed in all endeavors.