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Businesses in the UAE must have tired of hearing about UAE corporate tax from every corner. But, to run a business smoothly in the UAE requires getting familiar with it. Since the UAE corporate tax is set to come into effect on June 1st, 2023, businesses need to understand how to claim foreign tax credits as well. To avoid double taxation on their income and to claim foreign tax credits, business owners can seek help from any of the leading accounting and auditing firms in the UAE.
When you operate a business in one country and receive revenue from another country's business, you may be subject to double taxation. Having to pay double taxes makes international business unaffordable. And if a company is forced to pay taxes in two countries, it would hinder development. A tax credit system will be included in the UAE's corporate tax regime to avoid the risk of double taxation.
Among the lowest corporate tax rates in the world, the UAE has the lowest rate in the GCC, where Bahrain is now the only country without a CT regime. As of right now, it is obvious that the UAE's corporate tax regime will adhere to best practices around the world and that its implementation will be accompanied by simple corporate tax compliance requirements. In the UAE, corporations must pay corporate tax on the profits they disclose in their financial statements, which must be produced in conformity with generally accepted accounting principles. There will be a few exclusions and modifications. This indicates that financial statements must now always be audited on schedule.
This new UAE Corporate Tax (Dubai/UAE CT) and its administrative corporate tax compliance framework will be widely discussed in the UAE's rapidly changing legal and compliance environment. The major regional and global economies will closely monitor the implementation and take the UAE's corporate tax rate into account when making their calculations. The UAE corporate tax rate would still be among the lowest in the world, but even so, it represents a significant improvement over the prior tax regime. Its implementation has an impact on every aspect of business operations, including pricing, marketing, accounting procedures, documentation, and IT infrastructure.
The majority of enterprises in the UAE operate through branches or subsidiaries in several other countries. In most cases, a foreign branch would be considered a Permanent Establishment (PE) in that nation and be subject to the corporate tax or its equivalent tax on its profits there. As a result, the company will be required to pay corporate tax in that foreign country. On the other hand, under the proposed UAE corporate tax regime, businesses can claim a credit for the tax paid in another country against the UAE corporation tax liability on any foreign-sourced income that is not otherwise exempt. Under the UAE corporate tax system, this is known as the "Foreign Tax Credit."
At the same time, businesses are not permitted to carry any unused foreign tax credit forward or back to earlier tax periods. Any unused foreign tax credit will not be refunded by the Federal Tax Authority (FTA). The UAE corporate tax public consultation document details the maximum foreign tax credit. Corporate tax consultants in the UAE can offer you additional guidance on unused foreign tax credits.
The proposed UAE corporate tax regime will tax UAE residents on their worldwide income. However, foreign-earned income, such as that from qualified foreign shareholdings and foreign subsidiaries, will be exempt from corporate taxes. In such scenarios, UAE companies have the following options:
Top companies in the UAE have already begun assessing their UAE corporate tax readiness. Early preparation for corporate tax compliance is essential to avoid higher implementation costs and reduce the strain on internal teams to complete these preparations by a strict last-minute deadline. Currently, there are no clear guidelines for claiming the tax credit since the UAE Corporate Tax Law has not yet been released. It is expected that the upcoming UAE Corporate Tax Law will include detailed guidelines for claiming the tax credit.
Since you are not an expert in accounting, it is advisable to seek the help of Reyson Badger, one of the best accounting and auditing firms in Dubai, UAE. Reyson Badger can help you prepare for the proposed corporate tax regime. Our expert team is up-to-date about business norms, so you don’t have to worry about it anymore. Let it be bookkeeping or financial reporting, we will responsibly assist you with all your accounting and auditing requirements. We are a team you can rely on.