Corporate Tax (CT) Withholding in the UAE

As part of the Corporate Tax (CT) regime introduced in the UAE, the concept of withholding tax (WHT) is an important consideration for businesses engaged in cross-border transactions. Withholding tax refers to the practice of deducting a portion of the payment due to a foreign entity before it is made. This deduction is then remitted to the tax authorities on behalf of the foreign entity.

However, under the UAE’s new Corporate Tax law that became effective on June 1, 2023, there are no withholding tax obligations on most types of payments made by businesses in the UAE. This is in line with the UAE’s efforts to maintain a business-friendly environment that encourages investment and international business operations. However, certain exceptions exist, and it is important to understand the broader context.

Here is an explanation of CT withholding in the UAE:

1. General Overview of Withholding Tax

Withholding tax is typically applied to payments such as:

• Dividends
• Interest
• Royalties
• Service fees or management fees

In many countries, businesses are required to deduct a certain percentage of the payment made to a non-resident party and remit it to the government as a form of advance tax payment. The withheld amount is then credited against the foreign party’s tax liability in their home country or exempted under certain tax treaties.

2. Withholding Tax in the UAE: Current Status

Under the UAE Corporate Tax regime effective from June 2023, the UAE does not impose withholding tax on most payments made to non-residents, making it one of the few jurisdictions that offers such a tax treatment. This is an attractive feature for businesses that engage in international trade or have foreign investors.

Key Points on Withholding Tax in the UAE:

• No Withholding Tax on Dividends: Payments such as dividends, interest, and royalties paid to foreign entities are not subject to withholding tax in the UAE.
• No Withholding Tax on Service Fees: Similarly, payments for services rendered, whether management fees, consultancy fees, or other professional services, are generally not subject to withholding tax.

This non-imposition of withholding tax on international payments is a key element of the UAE’s strategy to attract foreign investment and businesses to the region.

3. Exceptions and Specific Cases

While the UAE does not impose withholding tax on most payments, there are certain exceptions that businesses should be aware of, particularly in light of global efforts to prevent tax evasion, base erosion, and profit shifting (commonly referred to as BEPS).

• Transfer Pricing and Related-Party Transactions:

• • In the case of related-party transactions, the arm’s length principle (as outlined by the OECD BEPS framework) will apply. If a payment is made by a UAE entity to a related foreign entity at a non-arm’s length price, tax authorities may scrutinize the payment to ensure it is not artificially shifted out of the UAE for tax avoidance purposes.
  • Businesses involved in cross-border transactions with related parties should ensure they comply with the UAE’s transfer pricing rules and maintain documentation to justify the pricing of these transactions.

• Non-Treaty Payments:

• • While the UAE has an extensive network of Double Taxation Treaties (DTTs) with other countries, some payments to countries without a tax treaty with the UAE could be subject to withholding taxes in the country of the payee. In such cases, the foreign tax authorities may impose WHT on income (such as royalties or interest) paid to entities in the UAE.
  • Businesses should check the DTTs in place between the UAE and the recipient country to determine if withholding tax applies. The DTTs often reduce or eliminate withholding tax on cross-border payments.

4. Impact of UAE’s Corporate Tax on Withholding Tax

While the UAE Corporate Tax regime does not introduce withholding taxes, it may still affect businesses in certain scenarios, particularly those engaged in cross-border transactions. Here are some key impacts:

• Cross-Border Payments: UAE businesses making payments to foreign entities may have to assess the tax treatment of payments under the relevant Double Taxation Treaty (DTT) or local laws in the recipient country. Although the UAE does not impose withholding tax, the foreign jurisdiction may still do so.
• Global Tax Compliance: The introduction of corporate tax in the UAE also means that businesses now need to be more diligent about their global tax compliance and ensure that payments to foreign entities are in line with international tax laws, especially in the context of OECD BEPS guidelines.
• Transfer Pricing Adjustments: Cross-border payments between related parties may be scrutinized by tax authorities to ensure that the payments align with the arm’s length principle under UAE transfer pricing rules. Although there is no withholding tax, transfer pricing adjustments may be made in the case of non-compliance with pricing guidelines.

5. Double Taxation Agreements (DTTs) and Withholding Tax

The UAE has signed a large number of Double Taxation Treaties (DTTs) with countries around the world, which can impact the withholding tax treatment of cross-border payments.

Key Aspects of DTTs:

• Reduction of Withholding Tax: Many of the DTTs signed by the UAE allow for a reduction or exemption of withholding tax on certain payments like dividends, interest, and royalties between contracting states. For example, a DTT may reduce or eliminate withholding tax on interest or royalties paid to foreign entities.
• Eligibility: The reduced or exempted withholding tax treatment is generally subject to the beneficial ownershipand substance requirements of the foreign recipient. This means that the foreign entity receiving the payment must meet specific criteria outlined in the DTT to benefit from reduced or zero withholding tax.

DTTs with Major Countries:

• The UAE has treaties with many countries, including the United States, United Kingdom, India, China, France, and several others. Businesses should consult these treaties to determine the withholding tax obligations in both the UAE and the other contracting country.

Example:

• If a UAE-based company pays royalties to a company in the United Kingdom, the relevant DTT may reduce the standard withholding tax rate in the UK. In some cases, if the recipient in the UK meets certain criteria (such as being a tax resident), the payment may be exempt from UK withholding tax altogether.

6. Future Developments and Global Tax Initiatives

The UAE is aligning with international tax standards as part of its participation in global efforts like the OECD BEPSframework. While the UAE does not impose withholding tax currently, businesses should stay updated on:

• OECD BEPS Framework: As part of international tax reform, countries are enhancing their tax reporting and information-sharing standards. This can impact the treatment of cross-border payments and related-party transactions.
• Global Minimum Tax Rate: The OECD Global Minimum Tax initiative could eventually affect cross-border transactions and lead to more stringent reporting requirements.

7. Key Considerations for Businesses

• Check DTTs: Always review the Double Taxation Treaties applicable between the UAE and the foreign country to assess whether withholding tax applies and at what rate.
• Maintain Transfer Pricing Documentation: If making payments to related entities abroad, ensure that transfer pricing documentation is maintained and that the arm’s length principle is followed.
• Plan for Cross-Border Transactions: Even though there is no withholding tax in the UAE, businesses involved in cross-border payments should consider potential withholding taxes in the recipient country and ensure compliance with global tax obligations.