Application of Tax Credits
The United Arab Emirates has grown fast as a business center. The country keeps working on its tax system to make it better for growth and investment. From June 2023, every business that works in the UAE must pay corporate tax on its profits. Sometimes, a company pays tax on the same income in both the UAE and another country. The UAE allows companies to use tax credits so they won’t pay twice on the same earnings.
Double Taxation in UAE
Double taxation means a business pays tax two times on the same income. It can happen when a company does business in more than one country.
- The UAE taxes a company’s income if it is based in the UAE.
- Another country may also tax that same income under its own rules.
This situation can make things tough for businesses.
You can also read: Adjustments Applicable on UAE Corporate Tax
Types of Double Taxation
Juridical Double Taxation:
This happens when two or more countries tax the same income of the same person or company. For example, the UAE and another country both charge tax on profits from the same sale.
Economic Double Taxation:
This happens when two or more countries tax the same income, but in the hands of different people. For instance, both a parent company and its branch pay tax on the same profit.
Tax Credits for Businesses in UAE
Many companies in the UAE have offices or branches in other countries. When these branches make profits, the country where they work usually charges tax. The UAE also taxes these profits as part of the parent company’s total income. That’s where tax credits help.
Foreign Tax Credit:
A business can claim a “Foreign Tax Credit” for the tax it already paid in another country. This way, it pays tax only once on the same profit.
- The amount a company can claim is limited.
- The business can only claim the lesser of:
- The foreign tax paid, or
- The UAE corporate tax due on that foreign income.
Example of How a Foreign Tax Credit Works
Let’s use an example:
XYZ is a company based in the UAE. It earns income from the UAE, the US, and China.
- The UAE charges corporate tax on all income, including money from the US and China.
- The US and China also tax the profits made in their countries.
- If XYZ pays $12 million tax in the US, $9 million in China, and the UAE tax due is $11 million, XYZ can only claim a tax credit up to $11 million (the lower number).
You can also read: Transfer Pricing Documentation Under Corporate Tax
Important Rules for Claiming Tax Credits
- The company must keep records to prove the tax was paid abroad.
- The unused foreign tax credit can’t be used in another year or get refunded.
- The UAE’s Federal Tax Authority (FTA) checks these records when a company claims the credit.
Why Tax Credits Matter for UAE Businesses
Tax credits help make the system fair. They encourage companies to grow and invest around the world without being taxed twice. By using tax credits, companies can save money and avoid paying more tax than they should.
Benefits:
- Prevents double taxation
- Supports international trade
- Reduces total tax cost for UAE companies
- Encourages global business growth
Points to Remember:
- Companies must know the tax laws of every country they work in.
- They need good accounting to track taxes paid in every country.
- Proper advice helps companies use tax credits correctly and avoid mistakes.
How Mubarak Al Ketbi (MAK) Auditing Can Help
Mubarak Al Ketbi (MAK) Auditing gives clear advice about tax credits for your company in the UAE. Our experts help you handle taxes in every country, keep your records in order, and claim credits the right way. We help you play by the rules and get the most out of your profits. Remember, “Don’t put all your eggs in one basket”—get the right help with your tax credits!
- For more information, visit our office:
Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates - Or contact/WhatsApp us at +971 50 276 2132
