It is critical for business owners and entrepreneurs in the UAE to understand withholding tax within the larger context of corporate taxation to abide by the country’s ever-changing tax regulations. In December 2022, the UAE Federal Tax Authority issued a decree that outlined the responsibilities concerning withholding tax within the UAE’s corporate tax system.

This comprehensive guide seeks to clarify corporate taxes, with an emphasis on withholding tax in the UAE for businesses. It explores the most recent laws and their effects on business activities in the UAE. Whether managing tax obligations or looking to enhance your tax strategy, this blog offers useful insights and answers questions about the current corporate tax environment, especially regarding withholding tax in the UAE.

 

Withholding Tax in the UAE for Businesses

Withholding tax in the UAE consists of deducting a part of an employee’s or contractor’s earnings directly at the source, usually by their employer or business organization. This subtracted sum serves as an upfront payment towards the person’s yearly income tax obligation. If excessive amounts are withheld, the person might qualify for a tax refund, whereas inadequate withholding could result in owing taxes when submitting returns.

On December 9, 2022, the Ministry of Finance (MoF) and Federal Tax Authority (FTA) implemented Federal Decree-Law No. 47, which establishes the existing rules regulating corporate tax (CT) and withholding tax in the UAE. As per the decree, the withholding tax is now established at 0%. These modifications took effect on June 1, 2023, and are applicable to all following financial years.

Withholding Tax in the UAE for Businesses: Exemptions

• Revenue produced by a foreign firm in the UAE that is not linked to its Permanent Establishment (PE) in that nation.
• Income originating from the mainland enjoys the advantages of the Free Zone’s 0% corporate tax policy, except for transactions carried out via an onshore branch.
• Dividends or other profit distributions from a Free Zone Person are not taxed for shareholders based in the mainland. For example, when a DMCC company pays dividends to a resident of the JAFZA free zone, the withholding tax is exempt at a rate of 0%.

 

Benefits of Withholding Tax in the UAE for Businesses

Here are some key advantages discussed in detail below:

• Withholding tax ensures that companies comply with the local laws and regulations; thus, they avoid any penalties or fines resulting from non-compliance.
• It makes foreign people liable for income generated within the UAE, making them more transparent and compliant with tax obligations.
• Withholding tax systems effectively oversee and gather taxes from non-residents without the possibility of double taxation and disputes.
• Withholding tax generates extra revenue for the government and helps fiscal sustainability by discouraging tax evasion.
• Withholding taxes often replace income taxes, and this often provides companies with more leeway in the management of their tax obligations.
• The withholding tax can be used as an incentive for the employees, allowing companies to subtract taxes from wages, while giving the staff additional bonuses or fringe benefits.

 

Here are the advantages of Business Operations in the UAE:

• The UAE provides a favorable business expansion atmosphere, marked by pro-business regulations and dynamic economic culture, which is unique in the world.
• The implementation of a reduced corporate tax rate and special exemptions for certain businesses and organizations underscores the UAE’s commitment to attracting entrepreneurs and companies from all over the world.
• These tax benefits mitigate corporate pressures from the tax and improve the bottom lines that create a chance to invest, positioning the UAE as an ideal destination for doing business.
• The strategic geographical location that acts like a bridge among Europe, Africa, and Asia means unmatchable access to international trade lanes and global markets which create opportunities for business development.
• The UAE boosts its appeal as a business center by maintaining a stable political climate and implementing forward-thinking regulatory policies, encouraging growth and innovation.
• These advantages together enhance the UAE’s standing as a prominent global business hub, where minimal corporate tax rates and specific exemptions are vital in attracting economic interest, fostering growth and diversification.

 

Tax credit for Withholding Tax in the UAE

The maximum withholding tax credit will be the lesser of the following:

(a) Sum of withholding tax taken out pursuant to paragraph 2 of article 45 of federal law decree no. 47

(b) Outstanding corporate tax obligation as per this decree

When an individual qualifies as a taxable entity during a tax period, the corporate tax owed as per article 3 of federal law decree no. 47 can be lowered by the amount of the withholding tax credit for that tax period.

If there is any surplus withholding tax credit for that tax period, that specific amount will be reimbursed to the taxpayer as outlined in article 49 of the decree.

Refund

• A request can be submitted to the tax authority for a refund if the withholding tax credit surpasses the corporate tax amount owed.
• The tax authority will review the application and provide notice regarding its decision on the submitted application.

 

Strategies for Handling Withholding Tax Responsibilities

Steps that can be taken to address the effects of withholding tax responsibilities:

• Numerous countries establish tax agreements with each other. Keep yourself informed about treaties like these, as they frequently offer reduced withholding tax rates and specific exemptions.
• Tax-related rules and regulations frequently change in a dynamic environment, potentially affecting withholding tax rates and exemptions. Stay updated with these changes and reduce tax obligations.
• Obtain expert guidance by consulting tax advisers or legal specialists, as their insights will assist in effectively managing intricate tax matters.
• Ensure that the timing of tax payments conforms to tax laws and regulations while maximizing cash flow.

 

 About Us

Withholding taxes can be a significant aspect of your tax obligations, especially for international businesses. Our Withholding Tax Returns and Filing service ensures that you comply with withholding tax requirements in all jurisdictions where you operate, minimizing the risk of penalties and ensuring timely submission of returns.

 

 

FAQs

Who is Subject to Withholding Tax?

Withholding Tax applies to payments made by UAE businesses to non-residents for services such as:

• Consultancy and professional services
• Technical support
• Royalty payments
• Interest and dividends
• Other specified financial transactions

What is the Withholding Tax Rate in the UAE?

The applicable Withholding Tax rate varies depending on the type of transaction:

• For services and royalties: Typically, 5%
• For interest payments: Typically, 0% (unless specified otherwise)
• For dividends: 0% (dividends paid to shareholders are exempt)

It’s important to review the latest FTA guidance, as rates may change based on agreements or international treaties.

 

How is Withholding Tax Calculated?

Withholding Tax is calculated based on the gross payment made to a non-resident. For example:

• If a UAE business pays AED 100,000 for consultancy services to a non-resident, and the withholding tax rate is 5%, the withheld tax amount would be AED 5,000.
• When Should Withholding Tax be Paid?

Businesses must withhold the tax and submit it to the FTA within a specific timeframe:

• Quarterly: For payments made to non-residents during each financial quarter
• Monthly: If applicable, depending on the volume and nature of transactions
• Failure to meet deadlines can lead to penalties and interest.