With the introduction of the UAE Corporate Tax (CT) regime, effective from 1 June 2023, businesses are now navigating a brand-new taxation landscape. Registration for corporate taxes and compliance with local rules is one part of the story, companies with foreign operations face an additional challenge: double taxation.
Double taxation occurs when a company pays tax on the same income in two jurisdictions for example, paying holding tax in a foreign country and then corporate in UAE again. To address this, the UAE Corporate Tax Framework introduces the concept of a Foreign Tax Credit (FTC). FTC is designed to provide relief, ensuring that businesses are not penalized for international expansion and global income currents. Below, we have compiled a comprehensive list of frequently asked questions (FAQ) to help UAE businesses understand how FTC works, what are the boundaries, and what steps they should take to effectively comply with them.
FAQs on Foreign Tax Credit (FTC) under the UAE Corporate Tax Regime
1. What is the Foreign Tax Credit (FTC) under UAE Corporate Tax?
The Foreign Tax Credit (FTC) is a mechanism that allows UAE resident companies to claim credit for taxes they have paid in a foreign jurisdiction on income that is also subject to UAE Corporate Tax.
For example, if a UAE company earns income from a branch in India and pays Indian corporate tax, it can offset that amount against its UAE CT liability on the same income. The goal is to prevent double taxation and ensure fair taxation of cross-border profits.
2. Who can claim the Foreign Tax Credit?
Any UAE resident company that earns foreign-sourced income and pays corporate income tax (or a tax of a similar nature) abroad can claim FTC, provided:
- The income is not exempt from UAE Corporate Tax, and
- Proof of foreign tax paid is available (receipts or certificates).
This applies to:
- UAE companies with overseas branches,
- UAE companies earning royalties, dividends, or service fees abroad,
- Multinational groups with cross-border business operations.
3. How is the FTC calculated?
The amount of FTC is limited to the lower of:
- The actual foreign tax paid, or
- The UAE Corporate Tax due on the same foreign income.
This ensures that FTC is only used to neutralize double taxation it cannot create a tax advantage.
Example:
- Foreign income = AED 1,000,000
- Tax paid abroad = AED 120,000 (12%)
- UAE Corporate Tax = AED 90,000 (9%)
FTC allowed = AED 90,000 (the lower of the two). The excess AED 30,000 cannot be refunded or carried forward.
4. Can unused FTC be carried forward?
No. Under the Public Consultation Document, unused FTC cannot be carried forward or refunded. If the foreign tax paid exceeds the UAE tax payable on the same income, the difference is effectively lost.
This means businesses must carefully plan their tax structures and avoid over-reliance on FTC.
5. Does FTC apply to withholding taxes on cross-border payments?
Yes. Many countries impose withholding taxes on payments such as:
- Royalties,
- Dividends,
- Service fees,
- Interest payments.
UAE businesses paying these withholding taxes abroad can claim FTC, provided the payment is recognized as foreign-sourced income under UAE CT.
6. How do UAE Double Taxation Treaties impact FTC?
The UAE has signed over 135 double taxation treaties with other countries. These treaties often:
- Reduce withholding tax rates,
- Provide exemptions on certain income (e.g., dividends or capital gains),
- Clarify where income should be taxed.
If a treaty applies, businesses must first apply treaty provisions. FTC is then available for any remaining double taxation exposure. Treaties always override domestic law to the extent they are more favorable.
7. What documentation is required to claim FTC?
Businesses must maintain robust documentation, including:
- Tax receipts or certificates from the foreign tax authority,
- Proof of payment (bank statements, invoices, etc.),
- Calculations showing how FTC was determined,
- Any applicable double tax treaty reference.
The Federal Tax Authority (FTA) may request evidence during audits, so accurate record-keeping is essential.
8. Is FTC available for income that is exempt in the UAE?
No. If income is exempt under UAE CTfor example, qualifying dividends or certain capital gains FTC does not apply, since there is no UAE CT liability on that income.
9. How does FTC affect Free Zone companies?
Free Zone entities enjoying the 0% CT regime generally do not need FTC. However:
- If a Free Zone company earns non-qualifying income subject to 9% CT, and foreign tax has been paid, FTC may be claimed.
- Free Zone companies should review whether their cross-border activities fall within qualifying or non-qualifying income categories.
10. How does FTC affect foreign branch income?
Income from foreign branches is usually subject to taxation in the foreign country. Under UAE CT:
- A UAE parent company must include the branch’s income in its UAE taxable income.
- FTC may then be claimed for the foreign tax paid, subject to the “lower of” limitation.
This ensures the UAE does not double tax profits that are already taxed abroad.
11. How do businesses apply FTC in practice?
When filing the UAE Corporate Tax return, businesses must:
- Disclose foreign-sourced income,
- Report the amount of foreign tax paid,
- Calculate the allowable FTC based on the “lower of” rule,
- Attach supporting documentation.
12. What challenges can businesses face with FTC?
Some common challenges include:
- Mismatched tax years (UAE vs. foreign country filing periods),
- Proof of foreign tax paid not readily available,
- Excess withholding taxes that cannot be fully credited,
- Complexity of double tax treaties in multi-country operations.
13. What strategies can businesses use to maximize FTC benefits?
- Leverage UAE tax treaties to reduce foreign withholding tax before FTC.
- Time foreign income recognition to align with UAE CT periods.
- Structure cross-border transactions to minimize exposure to unrecoverable taxes.
- Seek professional advice on treaty application and compliance.
14. What happens if foreign tax was refunded later?
If a business initially claims FTC and later receives a refund of foreign tax, the FTC must be adjusted accordingly. This may lead to additional UAE Corporate Tax liability in the year of adjustment.
15. How should businesses prepare for FTC compliance today?
Since the final UAE CT law is yet to be published, businesses should:
- Map all foreign income streams and related taxes,
- Review relevant UAE tax treaties
- Create systems for tracking and documenting foreign tax payments,
- Engage tax advisors to prepare compliance frameworks,
- Stay updated with the Ministry of Finance announcements.
Practical Example
Scenario
- A UAE resident logistics company earns AED 5 million from operations in Saudi Arabia.
- Saudi Arabia taxes this income at 20% = AED 1 million.
- UAE Corporate Tax liability on this income = 9% = AED 450,000.
Outcome
- FTC available = AED 450,000 (lower of the two).
- UAE CT payable on this foreign income = 0.
- The excess AED 550,000 paid in Saudi Arabia cannot be refunded or carried forward.
This example highlights why businesses need to align treaty benefits and tax planning to minimize unrecoverable foreign taxes.
Conclusion
The Foreign Tax Credit is one of the most important reliefs under the UAE Corporate Tax regime. It ensures that UAE companies with global operations are not unfairly taxed twice on the same income.
However, FTC has clear limitations:
- It is capped at the lower of foreign tax paid or UAE CT payable.
- It cannot be carried forward or refunded.
- It requires strong documentation and compliance.
For businesses in the UAE, especially those with cross-border activities, the key is to:
- Understand treaty benefits,
- Maintain records,
- Align with final Ministry of Finance guidance,
- Consult professional advisors for strategic tax planning.
At ebs Chartered Accountants, we guide UAE businesses through corporate tax compliance, double taxation relief, and international structuring. Our team ensures that companies maximize the benefits of the UAE’s Corporate Tax framework while staying fully compliant.
Contact us today for expert guidance on navigating FTC and the UAE Corporate Tax regime.