What is withholding tax and its proposed application in the UAE

The term ‘withholding tax’ refers to the tax withheld at source. In some jurisdictions, this is called pay-as-you-go. In the withholding tax (WHT), the party paying the amount against the goods and services withholds the tax at the source at the pre-given rates and pays the remaining amount to the party providing the goods and services. The amount of withholding tax is paid directly to the government by the party that deducts the tax at source. Like the jurisdictions where the personal income tax is applicable, tax is deducted at source by the employer on salary, and the employer pays the tax directly to the government.

Usually, WHT applies to cross-border payments as well. Moreover, WHT rates vary based on the nature of goods and services received and the relationship status with the nonresident supplier. Like in Saudi Arabia, while making payments to non-resident unrelated parties 20 per cent WHT applies to the management fee, 15 per cent to the royalties, and five per cent to rent, return on loans, technical & consulting services and, international telecommunication Services etc. If the payment is being made to the non-resident related parties, 15 per cent WHT applies to technical and consulting services and international telecommunication services.

It has been mentioned in the corporate tax public consultation document (the document) issued by the Ministry of Finance (MoF) of the UAE, a zero per cent withholding tax will apply on domestic and cross-border payments made by UAE businesses. Moreover, it has been clarified in the document that the following income will be subject to WHT at zero per cent.

• UAE sourced income earned by a foreign company that is not attributable to a Permanent Establishment (PE) in the UAE of that foreign company. This means if the foreign company has PE in the UAE, and the foreign company is earning any income from that PE, then zero per cent WHT will not apply. The PE of the foreign company will be considered tax resident in the UAE, and a standard rate of nine per cent will apply to the taxable profits of the PE of the foreign company in the UAE. Like XYZ UK, has a branch in the UAE with the name XYZ UAE. XYZ UAE will be assumed a UAE resident company. Any dividend repatriated to the UK will not be subject to corporate tax (CT), but the taxable profits of XYZ UAE will be subject to tax.

• Mainland UAE sourced income earned by a free zone person that benefits from the zero per cent CT regime unless the income is attributable to a mainland branch of that Free Zone Person. This means that if the free zone person earns any income from the UAE mainland, it will be subject to zero per cent WHT. However, if the free zone person has a branch on the mainland and earns any income from that branch, then zero per cent WHT will not apply; instead, the mainland branch will be considered a resident of the UAE, and a standard nine per cent corporate tax will apply on the taxable profits of the branch. Like Jafza company has a branch on the mainland with the name LMN, the LMN will be assumed a resident of the UAE, and its taxable profits will be subject nine per cent tax.

• Dividends and other profit distributions made by a free zone person that benefits from the zero per cent CT regime to a mainland UAE shareholder in the free zone person. It means if the dividend will be paid and the profit will be distributed by the free zone person (who enjoys a zero per cent CT regime) to a free zone person, then it will be zero per cent. If the free zone person is not enjoying a zero per cent CT regime or dividend is being paid and/or profit is being distributed not to a free zone person, then zero per cent will not apply. Like a DMCC company which enjoys zero per cent CT regime is paying dividends to a JAFZA free zone person, then zero per cent WHT will apply.

The income earned from the UAE resident person, from the contracts and activities performed in the UAE, assets utilized in the UAE, and rights used for economic purposes in the UAE will be considered UAE-sourced income. The law, once promulgated, will provide detailed guidance to determine UAE-sourced income.

There will not be any WHT in the UAE; businesses will not be required to deduct any tax from domestic and cross-border payments. Employers will not be asked to withhold any tax on the employees’ salaries as there is no personal income tax. The companies/employers will not be required to deposit any WHT, nor will they be required to submit any WHT returns.

The above reflects that the CT regime is exceptionally soft, and pro businesses keep in view the CT regimes working across the globe. The CT regime will not hamper the market's growth; instead, it will enhance transparency and lead towards a stable economy.

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 public consultation document on corporate tax. For any queries/clarifications, please write to him at compliance@kresscooper.com

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