Everything You Must Know About Foreign Branch Profit Exemption

As the UAE corporate tax is proposed to take effect from June 1st, 2023, companies need to analyse the potential impact of the tax on their business earnings. UAE businesses managing their foreign operations through a foreign branch or subsidiary will also be keen to know how their earnings will be taxed. Business owners are advised to consult with corporate tax consultants in Dubai to know how to align their business with the proposed corporate tax regime.

The UAE resident companies are subject to UAE corporate tax on their worldwide income. However, certain forms of income will be exempt from taxation to avoid instances of double taxation and to recognise the UAE’s position as an international business hub and leading holding company location. And the main exemption from the UAE corporate tax regime relates to the income earned by the UAE companies from operations conducted overseas through foreign subsidiaries or foreign branches. In this blog, we will discuss how the income earned through a foreign branch or subsidiary is exempted from taxation.

However, any tax decision should be based on the provisions to be included in the UAE corporate tax law which is yet to be released. Right now businesses can use the UAE Corporate Tax Public Consultation Document to start the tax preparation process. Read ahead to know further about the foreign branch exemption provision in the UAE corporate tax regime:

Tax Liability of Foreign Branch as a Legal Structure

UAE businesses can restructure their overseas operations either by setting up a foreign subsidiary or a foreign branch office. A foreign branch generally constitutes a Permanent Establishment (PE) in the foreign country and its profits will be subject to corporate tax or an equivalent tax in that overseas country. However, unlike a branch, a subsidiary is a separate legal entity, with its own books and records, and transactions between the UAE parent company and its foreign subsidiary would generally be clearly documented and recorded.

A foreign branch is not a separate legal entity but an extension of its parent entity in the UAE. This means, separate financial statements need not be prepared and most of the transactions done by the branch would be transactions of the parent company itself. This creates complexity in determining the ‘stand-alone’ financial results of the foreign branch.

Two Ways to Deal with Tax Liability on Foreign Branch Profits

The proposed UAE corporate tax regime recognises the complexities associated with attributing income and expenses to foreign branches. In lieu of this, the UAE companies are allowed to carry out any of the following actions

1. Elect to Claim an Exemption for Foreign Branch Profits

The regime of corporate tax in the UAE proposes that the election to claim a foreign branch profit exemption will apply to all foreign branches of the UAE Company. And most importantly, such an election to claim a foreign branch profit exemption will be irrevocable. However, the foreign branch exemption can’t be claimed if the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located. Corporate tax consultants in Dubai can advise businesses on the election to claim a foreign branch profit exemption.

2. Claim a Foreign Tax Credit for Taxes paid in the Foreign Branch Country

The proposed UAE corporate tax regime allows a credit for the tax paid in a foreign jurisdiction against the UAE corporate tax liability on the foreign sourced income that has not been otherwise exempted. This provision to avoid double taxation is known as a Foreign Tax Credit. The maximum foreign tax credit available will be the lower of

  • The amount of tax that was paid in the foreign jurisdiction; or
  • The UAE corporate tax payable on the foreign-sourced income

However, any unused Foreign Tax Credit will not be able to be carried forward or back to other tax periods. Furthermore, the Federal Tax Authority (FTA) will not refund any unutilised Foreign Tax Credit. Consult with corporate tax consultants in Dubai for further guidance on foreign tax credits.

Consult with the Best Corporate Tax Consultants in Dubai, UAE

Businesses can prepare for the proposed corporate tax regime with the help of the best corporate tax consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA can assist companies with robust reviews of their current business operations to assess their readiness for corporate tax. Our services at JCA as Corporate Tax Consultants include:

  • Corporate tax Assessment & Advisory Services (one-time or retainer basis)
  • Corporate tax Compliance Services
  • Corporate tax Agent Services to represent you to FTA in case of any notices served by FTA