UAE sourced income and application of corporate tax on it

In our previous articles, we have discussed the income of the non-resident person would be subject to tax if the income pertains to the permanent establishment (PE) of the non-resident person in the UAE, it is UAE-sourced income or the income has been derived through the nexus, the non-resident person has in the UAE. The question arises, what are UAE-sourced income, PE, and nexus of non-resident person in the UAE? In this article, we have discussed the UAE-sourced income, and in our upcoming articles, we will discuss the others.

Article 13 of the UAE corporate tax law covers the UAE-sourced income, and the article categorises such income into three categories.

In the first category, the law describes that if the person is earning any income from the resident person, it will be considered UAE-sourced income. We have already discussed that the resident person includes the juridical person incorporated or otherwise established or recognised in the UAE, the juridical person incorporated or otherwise established or recognized out of the UAE but controlled and managed in the UAE, the natural person who conducts business or business activity in the UAE or any other person defines in the cabinet decision. So, if the income is earned from these persons, it will be considered UAE-sourced income.

For example, P Ltd is registered in Australia, but the management of P Ltd is based in the UAE, from where all decisions are being taken related to P Ltd, so it will be assumed that P Ltd is a resident person in the UAE for corporate tax purposes. if the USA company is providing any goods/services to P Ltd, and earning any income, then as per the provision of the UAE CT law, the income of the USA company earned from P Ltd, will be subject to tax in the UAE.

In the second category, the law says that the income derived from a non-resident person and connected with or attributable to a PE of that non-resident person in the UAE shall be considered UAE-sourced income. In this income class, the connectivity of the income with the PE of a non-resident person is critical. If the income is not attributable to the PE of a non-resident person in the UAE, it will not be considered UAE-sourced income.

For example, a UK-based company (UKB Ltd) has a branch in the UAE, and an Italian supplier is supplying the services to the UAE branch of a UKB Ltd but getting the amount against this supply of services from the UKB Ltd. The income derived by the Italian supplier from the UKB Ltd will be taxable in the UAE, as this income pertains to or is attributable to the UAE branch of the UKB Ltd. If the same supplier provides services to any non-UAE branch of UKB Ltd, it will be out of the scope of the UAE CT law, as the company is not established in the UAE or controlled and managed in the UAE in case of a juridical person registered out of the UAE.

In the third category, UAE CT law says that activities like the sale of goods, provision of services, execution, or performance of contracts etc. if being performed in the UAE, any income generated from these activities will be considered UAE-sourced income. In the same way, if the assets, moveable or immovable, are located in the UAE, then the income generated from these assets will also be assumed UAE-sourced income.

The income related to the services, where the services are provided or utilised or benefited in the UAE, will be considered UAE-sourced income. If a German company is supplying services to Zee Ltd in the UAE, and Zee Ltd is consuming these services in the UAE, it will be considered UAE-sourced income. If the German company is providing services to a third party based out of the UAE but getting paid for these services from the UAE based company, then it will not be considered UAE-sourced income as the services have not been provided or consumed or utilised in the UAE.

Interest income will be considered UAE-sourced income if the loan has been secured against the property, either moveable or immovable, located in the UAE. Moreover, if the borrower is a resident person or a government entity, any interest earned or received will be considered UAE-sourced income.

As per law, insurance or reinsurance premiums will fall under the definition of the UAE-sourced income if the insured asset is in the UAE, or an insured person is a resident person, or the insured activity is being conducted in the UAE.

The worldwide income, including the UAE-sourced income, of a resident person is taxable in the UAE, while the non-resident is subject to tax in the UAE for their UAE-sourced income, income pertains to the PE of non-resident persons in the UAE and income related to their nexus in the UAE. The worldwide income of non-resident persons will not be subject to tax in the UAE.

Based on the scope of the law, the taxable persons must assess their status and apply the tax on the related income accordingly.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the UAE corporate tax law. For any queries/clarifications, please write to him at compliance@kresscooper.com

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