What is Foreign Tax Credit ?
Under the proposed law, UAE resident companies , will be subject to UAE CT on their global income. In certain cases, income derived by UAE business, from overseas operations may be liable to tax, both in the country where the business operations are carried out, and the UAE. In such a case, if the income is taxed twice, it may make the the entire business operation infeasible, or less attractive . In order to remove the harmful effect of double taxation on such income, Foreign Tax Credit under UAE Law has been provided . This provides that where any taxes have been paid in in a Foreign jurisdiction on a particular income, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the such foreign sourced income .
Computation of Foreign Tax Credit under UAE Law
The computation of foreign tax credit is the most important part on assessing taxability of income which suffers taxation in two countries. Under the UAE corporate tax law, foreign tax credit under the UAE law shall be the lower of the following two taxes : –
- Tax that has been paid in the foreign jurisdiction; or
- The UAE CT payable on the such foreign sourced income.
Let’s look at a few cases to understand this aspect : –
Case A – Foreign Tax Credit under UAE Law – UAE tax is lower than Tax deducted overseas
| Particulars | Amount (AED) |
| Tax paid in Foreign country | 100,000 |
| Tax Payable under UAE provision | 80,000 |
| FTC Available (Lower of A or B) | (80,000) |
| Tax Payable | Nil |
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Case B – UAE tax is higher than Tax deducted overseas
| Particulars | Amount (AED) |
| Tax paid in Foreign country | 100,000 |
| Tax Payable under UAE provision | 120,000 |
| FTC Available (Lower of A or B) | (100,000) |
| Tax Payable | 20,000 |
Unutilised Foreign Tax Credit under UAE Law
Where the amount of tax deducted, is higher than the amount of tax credit which is available, the difference, which is also known as unutilised Foreign Tax Credit, shall have the following tax treatment : –
- It will not be carried forward to other tax periods
- It will not be carried back to other tax periods
- FTA would not refund any unutilised Foreign Tax Credit.
In case A above, even though the amount of tax which was deducted was AED 100,000 credit was available only for AED 80,000. The difference of AED 20,000 is the Foreign tax credit which is unutilised.
Year when FOREIGN TAX CREDIT shall be available
Generally, credit for the amount of any foreign tax paid by a taxable person, is allowed in the year in which the income corresponding to such tax has been offered to tax .
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