Withholding Tax in UAE A Corporate Tax Guide

Withholding Tax in UAE Corporate Tax and Impact of Withholding Tax on Cross-Border Payments

Being a global hub, many companies in the UAE are into international business, which includes trading, services, investments, etc. When there is a cross-border transaction, many countries are imposing withholding tax on the payments. With the introduction of Corporate Tax, business owners are confused about the withholding tax imposed in the foreign country where they do transactions. In this article, let us discuss the concept of withholding tax and its impact on businesses in the UAE while making cross-border payments.

Concept of withholding tax

Let us understand the concept of withholding tax through an example. Company A is registered in the UAE, and they are taking services from Company B, which is also registered in the UAE. Now, when company A pays company B for the services received, company A considers it an expense, and their tax will be lower to the extent of payments made. On the other side, company B books this as an income and pays Corporate Tax on their profit. In this transaction, UAE has no tax loss.

Imagine the same services are taken by company A from the UK and paid to a foreign country. In such transactions, for company A, it is still an expense, whereas the corresponding income is booked in a foreign country. This type of cross-border transaction will lead a country to a tax loss, and that is the reason countries started imposing withholding taxes on cross-border payments.

In the above example, imagine if the UAE has a 5% withholding tax (just for example, currently the withholding tax rate in UAE is 0% as per UAE Corporate Tax Law), while company A remits the payment to the UK company (example:  AED 100,000), company A has to withhold 5% of the remittance amount, which is AED 5,000/-, and deposit this money to the Federal Tax Authority.

Withholding Tax in the UAE Corporate Tax Law

Article 45 of the Corporate Tax Law explains about withholding tax in the UAE. Withholding tax is imposed on foreign payments made by a UAE-taxable person. The tax liability in case of withholding tax is on the non-resident. If a non-resident, let us say a foreign company, provides any services to a UAE company, the income source is UAE, and such income may be subject to withholding tax as per UAE Corporate Tax Law.

The payer, who is a taxable person in the UAE, shall deduct the percentage of withholding tax that is prescribed in the tax law. Currently, the UAE is imposing a 0% withholding tax on payments to non-residents who earn income from the UAE, neither through a permanent establishment nor through a nexus in the UAE. Read more about when non-residents are taxed in the UAE.

Withholding Tax Credit

Withholding tax credits can be availed of by foreign companies in certain circumstances. For easy understanding, let us discuss this through an example. Let us assume that the UAE has a withholding tax of 10% for the dividend payments made by UAE Companies to foreign countries (assuming that there are no double taxation treaties available between the UAE and the foreign country).

Company A is a UAE company. A Cayman Islands offshore company holds 100% of the shares of UAE. In the year 2025, company A wants to pay a dividend to the parent company, which is AED 1 million. As per the withholding tax rate applicable in UAE for dividend payments to foreign countries, company A has to hold 10% of the gross dividend payout, which is AED 100,000/- (AAED 1,000,000*10%). Company A can remit to Cayman Island parent entity AED 900,000/- (AED 1,000,000 less AED 100,000), and the amount deducted company A shall pay to the Federal Tax Authority.

Let us assume that in the year 2025, the Cayman Island parent company became a resident in the UAE for Corporate Tax purposes due to the effective management of the parent company from the UAE. Now Cayman Company has to register and file corporate tax returns in the UAE. Assuming that the Cayman Company has no income and expenses other than Dividend Company A, what would be the tax liability in the UAE for the Cayman Island Company in the year 2025?

Now let us understand what will happen to the excess withholding tax credit.

The excess withholding tax credit can be obtained from the Federal Tax Authority through a refund application.

To summarize, withholding tax impact will be triggered in UAE only when;

• UAE will increase the withholding tax rate from 0% in the future.
• A foreign entity that is affected by the withholding tax deduction in the UAE becomes taxable in the UAE and files the corporate tax return.

Keep in mind that, as per Article 66 of the UAE Corporate Tax Law, if any conditions in the international agreements signed by the UAE are contradictory to the corporate tax law, the tax treaty provisions are considered valid. UAE has almost 140 active double taxation treaties, and in the future, any businesses that may deduct withholding tax for cross-border payments may refer the double taxation treaty signed by the UAE to the respective country.

To learn more about Withholding Tax in UAE A Corporate Tax Guide, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.