Foreign Source Income -Taxability for Non-residents and Free Zone Persons in UAE

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The FTA recently issued a comprehensive guide on Taxation of Foreign Source Income under the UAE Corporate Tax (CT) Law. In this write-up, we have analyzed the taxation of fforeign source income for non-resident persons operating in the UAE as well as Qualified

Free Zone Persons (QFZP).

Taxation of foreign source income for non-residents Non-residents operating in the UAE may not necessarily be taxed on their entire income in the UAE. Hence, it is important to understand what kind of foreign source income is taxable for non-residents in the UAE.

1. Juridical Person (Non-Resident): A juridical person is deemed a non-resident person if it is incorporated outside the UAE and is not effectively managed within the country. CT applies to taxable income related to its UAE PE, state source income not attributable to the PE, and taxable income linked to its UAE nexus. Thus, foreign source income of a non- resident juridical person is taxable in the UAE only if it has a PE in the UAE.

2. Natural Person (Non-Resident):

A natural person becomes a non-resident person if he/she has a PE in the UAE, with a turnover exceeding AED 1 million in a calendar year, or if he/she derives state source income. State source income, inherently linked to the UAE, is not considered foreign source income. Therefore, a non-resident natural person can only possess foreign source income if he/she has a PE in the UAE (with a turnover exceeding AED 1 million) and the foreign source income is attributable to this PE.

Qualified Free Zone Persons

The UAE CT law provides that Qualifying Income of a Qualifying Free Zone Person (QFZP) is subject to 0% corporate tax. Since a Free Zone is an area within the UAE territory, income derived from a Free Zone Person will either be income derived from a resident person, or income derived from a non-resident person that is attributable to its UAE PE. Hence, income derived from a Free Zone Person does not qualify as foreign source income.

A QFZP may also derive income or profits from a domestic or foreign PE. Income or profits from a domestic PE, which is a PE located in the mainland UAE, is not considered foreign source income. Income or profits derived by a from its foreign PE, which is a PE located outside the UAE, is foreign source income. Since QFZP is subject to 0% tax rate in the UAE, it may not be entitled to FTC on tax paid overseas on such foreign source income. For instance, a QFZP loans funds to its foreign subsidiary in Country F, receiving Interest income. Despite withholding tax deducted in Country F, the interest income qualifies as "Qualifying Income" of the QFZP in the UAE, subject to a 0% tax rate. However, no FTC is applicable on withholding tax paid in Country

Tax structuring

Depending on the global business model and organization structure, it may be worthwhile for a taxpayer to consider whether the normal tax regime (with 9% CT rate and FTC) is more beneficial than the QFZP regime (with 0% CT rate and no FTC). Likewise, it may be beneficial to operate in the UAE as a resident / QFZP rather than a non-resident depending on the activities of the entity.

Conclusion

In real life scenarios, the onus to establish whether a particular income can be considered as foreign source income or not in the UAE lies on the taxpayer. Hence, it becomes inevitable for the taxpayer to maintain adequate evidence and documentation in support of the tax position taken for foreign source income.

Disclaimer : The content on this website is provided for general informational purposes only. It is not intended as professional advice and should not be construed as such. The information is based on the knowledge and experience available at the time of writing and is subject to change.