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Foreign tax credit

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-FTC-2024.1
By

How does the UAE foreign tax credit work?

Foreign tax reduces UAE Corporate Tax only up to the UAE tax due on the same income, and an unused credit cannot be carried forward or back.

Per Federal Decree-Law No. 47 of 2022, Article 47, Foreign Tax Credit

Corporate Tax due under Article 3 can be reduced by the Foreign Tax Credit for the relevant Tax Period. The credit cannot exceed the amount of Corporate Tax due on the relevant income, and any unutilised amount cannot be carried forward or carried back. The Taxable Person must maintain all records necessary for the purposes of claiming the credit.

Second in the Article 44 settlement order, after the Withholding Tax Credit. Where the ceiling binds, the excess foreign tax is lost outright — it is neither creditable in another period nor deductible, since Article 33(8) denies a deduction for tax on income imposed outside the State.

The credit, its ceiling, and what happens to the rest

47(1)–(2) — the credit and its limit

  • Corporate Tax due under Article 3 can be reduced by the Foreign Tax Credit for the relevant Tax Period
  • The credit cannot exceed the amount of Corporate Tax due on the relevant income

The ceiling is per relevant income, not per period

Clause 2 caps the credit at the Corporate Tax due on the relevant income — not at the Taxable Person's whole liability. A caller who supplies the total liability instead would get a credit larger than the article allows, which is why the input and its question both say so.

47(3) — the part that is easy to miss

Any unutilised Foreign Tax Credit cannot be carried forward or carried back. It is lost. And because Article 33(8) denies a deduction for tax on income imposed outside the State, there is no second route to relief for it either.

47(4) — records

The Taxable Person must maintain all records necessary for the purposes of claiming the credit. That is not arithmetic, so the rule carries it as a determination and says the claim rests on it rather than testing it as a pass or fail.

Article 44 — where this sits

The Corporate Tax due is settled by the Withholding Tax Credit first, then by this credit, then by anything the Cabinet specifies.

How the ceiling is measured — FTA Taxation of Foreign Source Income Guide (CTGFSI1, 8.3)

  • Income by income: each item of foreign source income has its own ceiling
  • On NET income: the item less economically linked expenditure, even where the foreign tax was on the gross amount
  • Apportioned across the 0% and 9% bands: Corporate Tax due on total Taxable Income × the item's net income ÷ total Taxable Income
  • No credit on Exempt Income (a participation-exempt dividend), and none in a loss position
  • Tax 'paid' includes tax accrued and committed, not tax contested or refundable; a later refund of foreign tax reduces the credit and may need a Voluntary Disclosure

Records — Article 47(4) and the guide (8.6)

  • The foreign income in the foreign currency, the exchange rate, the year, the nature and amount of the foreign tax, the date paid, and whether it was an instalment, withholding or final tax
  • Evidence: the foreign authority's receipt, a withholding certificate, the foreign return with computations, or a letter confirming payment — translated into Arabic or English if needed

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. An undecided input is never read as a no.

  2. 2

    Corporate Tax due on the relevant income

    Where there is no Corporate Tax on the relevant income, there is nothing for a credit to reduce, and the whole of the foreign tax is lost under Article 47(3).

  3. 3

    Foreign Tax Credit within the limit

    Where the foreign tax does not exceed the Corporate Tax due on that income, the whole amount is creditable.

  4. 4

    Limit on the Foreign Tax Credit

    Where it does exceed it, the credit is the ceiling and the balance is lost — not carried forward, not carried back, not deductible.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Foreign tax below the UAE tax on the same income

A company pays AED 40,000 of tax abroad on income on which AED 90,000 of Corporate Tax is due here, with the supporting records kept.

Computed

A Foreign Tax Credit of AED 40,000 as computed: foreign tax of AED 40,000 against a ceiling of AED 90,000, being the Corporate Tax due on the relevant income under Article 47(2), so the whole amount is creditable. Article 44 applies this credit second, after any Withholding Tax Credit. Based on the figures you supplied. Article 47(4) requires the records supporting the claim to be maintained, which you have confirmed.

Workings

Tax on income imposed outside the Stateas supplied
AED 40,000
Corporate Tax due on the relevant incomeArticle 47(2) — the ceiling, being the tax on that income and not the whole liability
AED 90,000
Foreign Tax Creditthe whole foreign tax, within the ceiling
AED 40,000
Foreign tax lostnil
AED 0

Decided by the foreign tax credit within the limit

Foreign tax above the UAE tax on the same income

The same company pays AED 250,000 abroad on income bearing AED 90,000 of Corporate Tax here. The excess is lost.

Computed

A Foreign Tax Credit of AED 90,000 as computed: foreign tax of AED 250,000 against a ceiling of AED 90,000, being the Corporate Tax due on the relevant income under Article 47(2), so the ceiling binds and AED 160,000 is lost — Article 47(3) does not allow an unutilised credit to be carried forward or back, and Article 33(8) denies a deduction for it. Article 44 applies this credit second, after any Withholding Tax Credit. Based on the figures you supplied. Article 47(4) requires the records supporting the claim to be maintained, which you have confirmed.

Workings

Tax on income imposed outside the Stateas supplied
AED 250,000
Corporate Tax due on the relevant incomeArticle 47(2) — the ceiling, being the tax on that income and not the whole liability
AED 90,000
Foreign Tax CreditArticle 47(2) — limited to the ceiling
AED 90,000
Foreign tax lostArticle 47(3) — not carried forward, not carried back. Article 33(8) also denies a deduction
AED 160,000

Decided by the limit on the foreign tax credit

No Corporate Tax on the relevant income

Foreign tax of AED 120,000 on income that bears no Corporate Tax here, so there is nothing for a credit to reduce.

Computed

No Foreign Tax Credit as computed: Article 47(2) caps the credit at the Corporate Tax due on the relevant income, and that figure is AED 0. The AED 120,000 of foreign tax is not creditable, and Article 47(3) does not allow it to be carried forward or back — so it is lost. Article 33(8) also denies a deduction for it. Article 47(4) requires the records supporting the claim to be maintained, which you have confirmed.

Workings

Tax on income imposed outside the Stateas supplied
AED 120,000
Corporate Tax due on the relevant incomeArticle 47(2) — the ceiling
AED 0
Foreign Tax Creditnil — no Corporate Tax on that income for a credit to reduce
AED 0
Foreign tax lostArticle 47(3) — not carried forward, not carried back
AED 120,000

Decided by the corporate tax due on the relevant income

Records not maintained

The first scenario, where the records Article 47(4) requires are not kept.

Computed

A Foreign Tax Credit of AED 40,000 as computed: foreign tax of AED 40,000 against a ceiling of AED 90,000, being the Corporate Tax due on the relevant income under Article 47(2), so the whole amount is creditable. Article 44 applies this credit second, after any Withholding Tax Credit. Based on the figures you supplied. Article 47(4) requires the Taxable Person to maintain all records necessary for the purposes of claiming a Foreign Tax Credit, and you have indicated they are not maintained. The credit computed here rests on that requirement being met and requires your determination.

Workings

Tax on income imposed outside the Stateas supplied
AED 40,000
Corporate Tax due on the relevant incomeArticle 47(2) — the ceiling, being the tax on that income and not the whole liability
AED 90,000
Foreign Tax Creditthe whole foreign tax, within the ceiling
AED 40,000
Foreign tax lostnil
AED 0

Decided by the foreign tax credit within the limit

The FTA's own example: foreign interest in a larger Taxable Income

Taxable Income of AED 10,000,000 includes AED 1,000,000 of net foreign interest that suffered AED 50,000 of withholding tax. Corporate Tax due on the whole is AED 866,250, so the tax due on the interest is AED 86,625 — above the foreign tax, which is credited in full. (CTGFSI1, Example 10.)

Computed

A Foreign Tax Credit of AED 50,000 as computed: foreign tax of AED 50,000 against a ceiling of AED 86,625, being the Corporate Tax due on the relevant income under Article 47(2), so the whole amount is creditable. Article 44 applies this credit second, after any Withholding Tax Credit. Based on the figures you supplied. Article 47(4) requires the records supporting the claim to be maintained, which you have confirmed.

Workings

Tax on income imposed outside the Stateas supplied
AED 50,000
Corporate Tax due on total Taxable Incomeas supplied, before any Foreign Tax Credit
AED 866,250
Net foreign source income — this itemas supplied, net of economically linked expenditure
AED 1,000,000
Total Taxable Incomeas supplied
AED 10,000,000
Corporate Tax due on the relevant incomeArticle 47(2) — apportioned: tax due × item ÷ Taxable Income (CTGFSI1 8.3.1)
AED 86,625
Foreign Tax Creditthe whole foreign tax, within the ceiling
AED 50,000
Foreign tax lostnil
AED 0

Decided by the foreign tax credit within the limit

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

3 inputs still need your determination:

  • What tax on income was imposed outside the State on the relevant income?
  • What Corporate Tax is due on this item of foreign income? Either give it directly, or give the item's net income, total Taxable Income and the Corporate Tax due on it, and the ceiling is apportioned as the FTA's guide prescribes. Article 47(2) caps the credit at the tax on that income, not the whole liability.
  • Are all the records necessary for the purposes of claiming a Foreign Tax Credit maintained, as Article 47(4) requires?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader