To prevent double taxation, UAE law allows UAE companies to claim a Foreign Tax Credit (FTC), even without a Double Tax Treaty (DTT) with another country.

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A Limited Liability Company (LLC) incorporated in the UAE is offering contracting services and generating revenue from Egypt. We sought to understand:

• Will the income from Egypt be taxable in the UAE?
• Can we claim expenses in our UAE tax return?
• Can we claim credit for taxes paid in Egypt in our UAE return?

The income subject to corporate tax in the UAE is determined by the legal and residency status of the taxable entity. Resident juridical persons are taxed on their worldwide income, while natural persons with business revenue exceeding Dh1 million in a calendar year are taxed on their UAE-related business income.

Understanding the legal and residency status of the UAE company earning income from Egypt is crucial. As an LLC, it is classified as a juridical person and is considered a resident for tax purposes. Therefore, its global income, including that from Egypt, is taxable in the UAE.

When preparing the UAE tax return, it's essential to assess the taxability of income from Egypt. If exempt, it should not be included in taxable income. For example, dividends received under the participation exemption from Egypt are not taxable in the UAE.

Mahar Afzal, Managing Partner at Kress Cooper Management Consultants, explains that when income from Egypt is taxed in the UAE, related expenses can be deducted according to general rules. If the income is exempt, related expenses are not deductible; if taxable, expenses can be deducted to determine taxable income. Certain expenses, like 50% of entertainment costs and non-business expenses, are not allowed under UAE tax law.

To avoid double taxation, UAE law allows UAE companies to claim an FTC, even without a DTT, including with Egypt. However, since a treaty exists between the UAE and Egypt, the relevant DTT provisions should be considered when claiming taxes paid in Egypt.

The amount of the FTC depends on the tax paid in Egypt, which varies based on the UAE company's relationship with its operations there. If the UAE company has a subsidiary in Egypt, repatriation may qualify for the participation exemption. The subsidiary's income and expenses are included in the UAE taxable income, and the FTC is granted based on relevant provisions.

If the UAE company has a Permanent Establishment (PE) in Egypt, such as a branch or office, the PE must register for tax purposes in Egypt and submit a tax return. Transactions between the PE and the UAE company are not taxable, but income and expenses related to Egyptian operations are included in taxable profits according to UAE tax law. The corresponding tax is allowed based on FTC provisions.

In a third scenario, a UAE company without a subsidiary or PE in Egypt generates income subject to withholding tax. The withheld tax is submitted to the Egyptian tax authority. The UAE company can claim a 100% refund by proving its UAE tax residency, which can be established with a tax residency certificate from the Federal Tax Authority (FTA). If the refund is not received, the UAE company can claim an FTC in the UAE based on general FTC rules.

The FTC applies only to taxes similar to corporate tax on taxable income in foreign jurisdictions and does not apply to VAT, excise tax, property tax, customs duties, estate tax, inheritance tax, stamp duty, and capital duty. The FTC is limited to the lower of the tax paid or committed to be paid and the tax due under UAE tax law. The tax due is calculated using the weighted average method. If a taxable person has multiple foreign income sources, excess FTC from one source cannot offset corporate tax due from another. If taxable income is negative (indicating a loss), no corporate tax is payable, and thus, no FTC is available. For timing differences, the credit for foreign tax paid is allowed in the tax period when foreign source income is included in taxable income under corporate tax law.

By considering these general FTC provisions, the company should assess the amount of FTC available and the period during which it can claim the FTC.

If a UAE company claims an FTC and the tax paid in Egypt changes, the company must adjust its FTC accordingly. If the change results in a tax benefit exceeding Dh10,000, the UAE company must adjust its return through a voluntary disclosure. If the tax benefit is less than Dh10,000, the adjustment can be made in the current or next tax return. Conversely, if the UAE company becomes liable for additional tax in Egypt, it must submit a voluntary disclosure to adjust its return.

In summary, income from Egypt, unless exempt, will be taxed in the UAE, and expenses will be allowed accordingly. The FTC will be allowed but limited to the lower of the tax paid in Egypt and the tax due in the UAE; unadjusted FTC will not be carried forward or back.

About the expert: Mahar Afzal is a Managing Partner at Kress Cooper Management Consultants. The above is not an official statement of Khaleej Times but an opinion of the writer. For queries/clarifications, please contact him at mahar@kresscooper.com.

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