What is state-sourced income in UAE corporate tax law?

State-sourced income is any revenue made from business, services, or property within the UAE.

Who must pay UAE corporate tax on state-sourced income?

Both UAE resident businesses and non-residents with a permanent place in UAE must pay tax.

How does a company avoid double taxation on foreign income?

A company can claim a foreign tax credit for taxes paid outside UAE, up to the UAE tax due on that income.

What are examples of state-sourced income?

Selling goods, supplying services, renting property, earning interest from UAE borrowers.

Why do businesses need to keep documents for tax credits?

Documents prove the business paid foreign taxes and are needed to claim the credit in UAE.

Corporate Tax & State-Sourced Income UAE Guide

How Does Corporate Tax Apply to State-Sourced Income in UAE and the Application of Tax Credits?

United Arab Emirates stands as a business hub for global investors. Many people choose UAE for its low taxes, great business environment, and steady growth. The government introduced a new corporate tax regime to meet global standards and boost its economy further. UAE now has a system for corporate tax that follows international rules and gives both benefits and responsibilities to businesses operating inside its borders.

What is Corporate Tax in UAE?

Corporate tax in UAE is a direct tax that the government imposes on the profit that companies and other businesses earn within a tax year. The Ministry of Finance announced that, from June 1, 2023, corporate tax will apply to businesses in the UAE.

Businesses must pay 0% tax on profits up to AED 375,000.
Businesses must pay 9% tax on profits above AED 375,000.

Companies must check their total taxable income each year and file their tax returns with the Federal Tax Authority.

What is State-Sourced Income in UAE?

State-sourced income means money a business earns from activities done inside one of the UAE’s emirates. Companies get state-sourced income from different business activities such as:

Selling goods or services in the UAE
Renting out properties inside the UAE
Running operations, projects, or contracts within the UAE

The UAE Corporate Tax Law, Article 13, gives clear guidance on state-sourced income. This law explains that state-sourced income is:

Any money received from residents
Any money earned from non-residents who have a permanent office in the UAE
Any money made by using assets, doing business, or providing services within UAE borders

Examples of State-Sourced Income:

Money from selling products in Dubai or Abu Dhabi
Income from providing services used in the UAE
Profits from contracts that get completed in the UAE
Rental income from properties inside the UAE
Sale of UAE resident’s stocks or assets
Payments for letting others use intellectual property inside the UAE
Interest income where the borrower is a UAE resident or property is inside the UAE

How Does UAE Corporate Tax Treat State-Sourced Income?

UAE law says that all income sourced in the state will be subject to UAE corporate tax rules. Companies, no matter if they are residents or non-residents with a permanent place in the UAE, must pay tax on their profits made from state-sourced income.

The UAE Corporate Tax Law sets out when and how businesses need to file returns and pay taxes on these earnings. Companies must record every source of revenue and be ready to show proof if asked by the authorities.

Application of Tax Credits in UAE Corporate Tax

UAE businesses sometimes earn money in other countries. They might pay tax both in that foreign country and in the UAE on the same income. This is called double taxation. To avoid this, UAE law lets businesses claim a Foreign Tax Credit.

How Foreign Tax Credit Works:

If a business pays tax in another country on some income, it can claim a tax credit in the UAE.
The credit will be the lesser of (a) the tax paid in the foreign country, or (b) the amount of UAE corporate tax due on that same foreign-sourced income.

Example:

If a UAE company pays $10 million in tax in the USA and $8 million in China, but the UAE tax on that income is only $9 million, the company can claim a tax credit for only $9 million (the lesser amount).

Important Points:

The credit only applies if the business already paid tax outside the UAE on the same income.
Businesses must keep all documents and proofs of foreign tax paid to claim the credit in UAE.

Bullet Points: Key Aspects of UAE Corporate Tax on State-Sourced Income

UAE applies a 0% tax rate for profits up to AED 375,000 and 9% for profits above that.
State-sourced income covers most revenue generated within UAE borders.
Businesses must keep accurate records and file tax returns with the FTA.
Double taxation is avoided using foreign tax credits, capped at the lower of the two tax amounts.
Documentation is essential for tax filings and credits.