The introduction of the UAE’s Corporate Tax (CT) regime in 2023 brought with it complexities for businesses with foreign operations. Understanding how foreign source income (FSI) is treated under the CT system is crucial for ensuring compliance and optimizing your tax obligations. This blog aims to provide a simplified overview of this topic for UAE taxpayers.

What is Foreign Source Income (FSI)?

FSI refers to any income earned by a taxable person that originates from sources outside the UAE. This can include:

       Profits from foreign branches and subsidiaries

        Dividends, interest, and royalties received from foreign entities

       Capital gains from the sale of assets located abroad

Is FSI Taxable in the UAE?

The answer depends on the category of the taxpayer and the type of FSI:

• Tax Resident Juridical Persons: These entities are subject to CT on their worldwide income, including FSI. However, certain exemptions and reliefs may apply.
• Tax Non-Resident Juridical Persons: These entities are only subject to CT on:

a. Income attributable to their Permanent Establishment (PE) in the UAE (if applicable).

b. Income sourced from the UAE (subject to a 0% Withholding Tax).

c. FSI is generally not taxable for them unless they have a PE in the UAE and the FSI is attributable to that PE.

• Tax Resident Individuals: These individuals are only subject to CT on their UAE source income exceeding AED 1 million per year. Their FSI is generally exempt unless it’s related to their taxable business activities in the UAE.

Tax Exemptions & Reliefs for FSI:

The UAE CT regime offers specific exemptions and reliefs for FSI:

a. Participation Exemption: Dividends received from qualified subsidiaries are generally exempt, preventing double taxation.

b. Foreign Tax Credit (FTC): Taxpayers can claim a credit against their CT liability for foreign income taxes paid on FSI, subject to specific conditions.

c. Exempt Income: Certain types of FSI, such as dividends from UAE government entities, are completely exempt from CT.

Navigating the complexities:

While this blog provides a basic overview, the UAE CT regime on FSI can be intricate.

Have questions about how Corporate Tax provisions apply to your business? Reach out to our team for expert advice.

Team TFAB