The United Arab Emirates (UAE), renowned for its financial prowess, has initiated a transformative fiscal journey with the introduction of a new federal corporate tax (CT) system, effective from June 2023. This revolutionary tax system holds substantial implications for businesses, including branches of both foreign and UAE-based companies. This blog sheds light on the applicability of CT, providing insights into key aspects to assist businesses in effectively navigating the new tax landscape.
Corporate Tax Liability for Branches of Foreign and UAE Companies
When a UAE-based company’s branch has a Permanent Establishment (PE) in a foreign country, its profits become subject to corporate tax in the UAE or equivalent tax in the foreign jurisdiction. As a branch is considered an extension of its parent entity, separate financial statements are not mandatory.
This perspective eliminates the need for separate CT registration for branches, requiring foreign and UAE companies to file a unified corporate tax return encompassing all their branches.
Foreign companies with a permanent establishment in the UAE fall under the CT regime, unless qualifying for exemptions or reliefs. The income earned by such branches through UAE business activities attracts corporate tax.
Determining the individual financial obligations of foreign and UAE company branches can be complex. However, these entities are generally subject to CT unless eligible for free zone tax incentives or other exemptions.
Tax Treatment for Branches of UAE Companies
Corporate tax obligations for branches of foreign and UAE companies hinge on the laws of the jurisdiction where the company’s head office is situated. The UAE corporate tax regime acknowledges complexities related to attributing income and expenses to foreign branches, offering two ways to handle CT liabilities:
Claim an Exemption for Branch Profits:
To prevent double taxation, the UAE CT regime proposes claiming a branch profit exemption applicable to all branches of UAE companies. Note that this exemption is irrevocable and contingent on the branch operating in a jurisdiction subject to sufficient tax.
Claim a Foreign Tax Credit:
UAE companies with branches abroad can seek a tax credit for foreign taxes paid, offsetting their UAE corporate tax liability. This provision, known as a Foreign Tax Credit, is capped at the lower of the tax paid in the foreign country or the UAE CT amount payable on the foreign-sourced income. Unused credits do not carry forward or back to other tax periods, and no refunds are provided for unutilized credits.
The new UAE corporate tax system applies to various entities, including foreign companies with branches in the UAE and UAE companies with branches abroad. With a moderate tax rate of 9% on profits exceeding AED 375,000, businesses must stay abreast of evolving regulations for full compliance with the UAE CT Law.
IBZ as Your Tax Consultant
As businesses acclimate to this new tax landscape, seeking guidance from tax experts like IBZ Consult becomes crucial. Staying updated on regulatory changes ensures financial stability and legal compliance. Reach out to CDA for a One Hour FREE CONSULTATION and navigate the complexities of the UAE Corporate Tax Law confidently.
