Withholding Tax in the UAE

Understanding withholding tax

Withholding Tax (WHT) serves as a mechanism to ensure timely tax revenue by requiring that a portion of specific payments be “withheld” at the source before reaching the recipient. In its simplest form, WHT represents a tax deducted directly from certain types of payments, such as income, dividends, royalties, or interest, primarily on payments made to non-residents.

Contributing Advisor

Jacob Thomas

Senior Associate, Corporate Accounting Services

The primary purpose of withholding tax is to mitigate the risk of tax revenue loss, particularly in cases involving cross-border transactions.

For instance, when a UAE-based company, Company A, makes a payment to a foreign company, Company B, based in the United Kingdom, Company A would typically record the payment as a business expense. Without withholding tax, Company B would report the revenue in the UK, which could result in no tax revenue for the UAE. By implementing withholding tax, the UAE would ensure that it retains a share of tax revenue from such international transactions, effectively safeguarding against tax base erosion.

Current withholding tax rates

As outlined in Federal Decree-Law No. 47, issued by the UAE Ministry of Finance (MoF) on December 9, 2022, the UAE has set its withholding tax (WHT) rate at 0 percent for most categories of payments to non-resident entities.

Effective from June 1, 2023, this 0 percent rate applies to a broad range of cross-border payments, making the UAE an attractive environment for international business transactions. Below, we explore the categories of income that fall under this regulation, including dividends, royalties, and service fees, and examine how this policy impacts business operations in the UAE.

Categories of income subject to withholding tax

Under the UAE Corporate Tax Law, the 0 percent withholding tax rate applies to specific categories of income earned by foreign entities from UAE-based sources. The income types generally subject to WHT in other jurisdictions but currently exempt in the UAE include:

• Payments distributed as dividends by UAE companies to foreign shareholders are subject to a 0 percent withholding tax rate, meaning they can be transferred without deductions. This exemption is a strategic benefit, particularly for foreign investors looking to retain full returns on their UAE investments.
• Payments for the use of intellectual property, trademarks, or patents fall within the category of royalties. In many tax systems, royalties are subject to withholding tax due to their connection to intangible assets that are often held by non-resident entities. However, in the UAE, such payments benefit from the 0 percent withholding tax rate, supporting international collaborations and the use of global intellectual property resources in the UAE.
• Fees paid for services rendered by non-residents to UAE companies also qualify for the 0 percent withholding tax rate. Whether these services are technical, consulting, or professional in nature, this exemption helps UAE businesses source specialized services from international providers without the burden of tax deductions, thereby enhancing operational flexibility and access to expertise.

The 0 percent withholding tax rate has far-reaching implications for the UAE’s business environment. First, it significantly reduces the tax burden on foreign entities deriving income from the UAE, making the country an appealing jurisdiction for international investments and corporate expansion.

Companies investing in the UAE can expect greater profitability, as earnings like dividends and royalties can be remitted in full to foreign shareholders and stakeholders without reduction.

Furthermore, the 0 percent WHT rate fosters smoother cash flow and enhances financial planning for companies operating in the UAE. Businesses are able to allocate resources more effectively, free from the concerns of withholding obligations.

Who is affected by withholding tax?

Under the UAE Corporate Tax Law, “taxable persons” are broadly defined as individuals or entities subject to UAE tax obligations on income derived within the country. Taxable persons generally include UAE-based corporations, partnerships, and sole proprietorships.

However, non-resident entities—such as foreign companies and individuals conducting business in the UAE—may also be subject to withholding tax if they earn income from UAE-based sources. Although the 0 percent WHT rate means no tax is currently deducted at the source, non-residents should still be aware of this regulatory framework and its potential impact on their obligations in the UAE.

Various non-resident entities could be affected by withholding tax regulations in the UAE, especially in the event of future rate adjustments. Examples include:

• Non-resident shareholders receiving dividends from UAE companies may be impacted by withholding tax regulations if a WHT rate is imposed in the future.
• International firms offering consulting, legal, or technical services to UAE-based businesses would typically be liable for withholding tax on service fees earned in the UAE.
• Companies that own intellectual property (IP) and receive royalties from UAE companies for the use of patents, trademarks, or proprietary technology would be subject to WHT.

While the 0 percent withholding tax rate currently exempts non-resident entities from tax deductions on UAE-sourced income, withholding tax has implications for how foreign companies structure their UAE operations. Companies with no permanent establishment in the UAE but deriving income from the UAE may find withholding tax regulations relevant if rates are adjusted.

Withholding tax credits

A withholding tax credit allows a taxable entity in the UAE to apply any WHT paid on certain cross-border payments as a reduction against its corporate tax (CT) liability. This is designed to prevent double taxation, ensuring that companies are not taxed twice on the same income.

If a withholding tax were levied, a business could use the tax paid as a credit against its corporate tax owed in the UAE. The WHT credit is limited to the lower of the withholding tax deducted under UAE law or the corporate tax due on the taxable income. Any excess WHT credits above this limit can be claimed back from the Federal Tax Authority (FTA) through a refund.

Eligibility for claiming withholding tax credits

Entities eligible to claim WHT credits include taxable persons in the UAE who have incurred withholding tax on income received from UAE sources. Foreign companies with a presence in the UAE, or companies that become UAE residents for tax purposes, may also qualify for these credits. The key eligibility requirements include:

• The entity must have suffered a withholding tax deduction on cross-border payments, such as dividends, royalties, or interest.
• If the foreign entity becomes a tax resident in the UAE by virtue of effective management within the country, it would be required to file a corporate tax return, thereby becoming eligible for WHT credits.
• Entities seeking to claim WHT credits must be filing corporate tax returns with the FTA, where they can apply the withholding tax credits against their tax liabilities.

When WHT credits exceed the amount of corporate tax owed, the excess amount can be refunded to the taxable person. To apply for this refund, companies must submit a formal refund application to the FTA, detailing the nature and amount of the WHT credits along with supporting documentation. This includes records of withholding tax deductions and proof of income earned, as well as any relevant tax treaties that could impact credit eligibility.

Case study example of withholding tax credit application

To understand WHT credits more clearly, let’s assume Company X, based in India, provides engineering consultancy services to a UAE construction firm, Company A. As per the terms of the contract, Company A makes a payment of AED 500,000 for services rendered by Company X.

If the UAE were to apply a withholding tax rate of 10% on payments to foreign companies for services (for the sake of this example), Company A would withhold AED 50,000 (10% of AED 500,000) from the payment and remit the remaining AED 450,000 to Company X. The withheld AED 50,000 would be paid directly to the Federal Tax Authority (FTA) by Company A.

Now, suppose that in the following year, Company X becomes a tax resident in the UAE because it establishes a branch in Dubai to conduct its business. As a UAE tax resident, Company X is required to file corporate tax returns in the UAE. Its total taxable income for the year is AED 600,000, with the AED 500,000 earned from the UAE contract and AED 100,000 from other non-UAE sources.

The corporate tax liability for Company X would be calculated as follows:

• 0 percent rate: Up to AED 375,000 of taxable income = no tax due
• 9 percent rate: On the remaining AED 225,000 (AED 600,000 – AED 375,000) = AED 20,250

Since Company X has already had AED 50,000 withheld by Company A, it can apply this amount as a credit against its corporate tax liability. The total tax liability is AED 20,250, so the AED 50,000 credit completely covers this, leaving an excess of AED 29,750 (AED 50,000 – AED 20,250).

Company X can then apply to the FTA for a refund of this excess AED 29,750. The process for claiming the refund would require submitting the necessary documentation, including the details of the withholding tax paid, proof of tax residency, and the tax return filings, to the FTA.

Double Taxation Treaties (DTTs) in withholding tax credits

Double Taxation Treaties (DTTs) further streamline the application of withholding tax credits by preventing companies from being taxed twice on the same income by different jurisdictions.

The UAE has 143 active DTTs, allowing foreign entities to reduce or eliminate withholding tax burdens, depending on treaty provisions. For instance, a foreign company with income in the UAE might use an applicable DTT to minimize WHT deductions, thus maximizing the benefit of credits and refund options.

Legal framework governing withholding tax in the UAE

The UAE’s current withholding tax policy has evolved alongside its broader corporate tax framework. Historically, the UAE was known for its tax-free environment, particularly in its Free Zones and on corporate earnings. However, as global tax standards have evolved and the UAE’s role in the international economy has expanded, the government has introduced measured tax regulations to align with international tax compliance and transparency norms.

The UAE Corporate Tax Law, effective as of June 1, 2023, outlines the guidelines for corporate tax and withholding tax under Federal Decree-Law No. 47 of 2022. Article 45 specifically addresses the rules around withholding tax, stating that WHT is imposed on payments made by UAE-based entities to foreign, non-resident companies or individuals deriving income from sources within the UAE.