Usually the WHT also applies to cross-border payments. WHT rates vary depending on the nature of the goods and services received and the status of the relationship with the non-resident supplier
The amount of withholding tax is paid directly to the State by the party withholding the tax at source.
The term “withholding tax” refers to the tax deducted at source. In some jurisdictions, this is called pay-as-you-go. In withholding tax (WHT), the party paying the amount of goods and services withholds tax at source at pre-established rates and remits the remaining amount to the party providing the goods and services. The amount of withholding tax is paid directly to the State by the party withholding the tax at source. Like jurisdictions where personal income tax is applicable, the tax is deducted at source by the employer from the salary, and the employer pays the tax directly to the government.
Usually the WHT also applies to cross-border payments. Additionally, WHT rates vary depending on the nature of the goods and services received and the status of the relationship with the non-resident supplier. As in Saudi Arabia, while making payments to unrelated non-resident parties, 20% of the WHT applies to management fees, 15% to royalties and 5% to rent, loan performance, technical services and consultancy and international telecommunications. Services, etc. If payment is made to non-resident related parties, 15 percent WHT applies to technical and consulting services and international telecommunications services.
It has been mentioned in the Corporate Tax Public Consultation Paper (the Paper) issued by the UAE Ministry of Finance (MoF) that a zero percent withholding tax will apply to payments domestic and cross-border made by UAE companies. Additionally, it was clarified in the document that the following earnings will be subject to zero percent WHT.
• Income from the United Arab Emirates earned by a foreign company that is not attributable to a permanent establishment (PE) in the UAE of that foreign company. This means that if the foreign company has a PE in the UAE and the foreign company derives income from that PE, then zero percent WHT will not apply. The PE of the foreign company will be considered tax resident in the UAE, and a standard rate of nine percent will apply to the taxable profits of the PE of the foreign company in the UAE. Like XYZ UK, has a branch in the United Arab Emirates under the name XYZ UAE. XYZ UAE will be considered a UAE resident company. Any dividends repatriated to the UK will not be subject to corporation tax (CT), but the chargeable profits of XYZ UAE will be subject to tax.
• Sourced from mainland United Arab Emirates income received by a free zone person who benefits from the zero percent CIT regime, unless the income is attributable to a mainland branch of that free zone person. This means that if the free zone person earns income from the UAE mainland, they will be subject to zero percent WHT. However, if the free zone person has a branch in the mainland and derives income from that branch, the zero percent WHT will not apply; instead, the mainland branch will be considered a resident of the UAE and a standard corporation tax of 9% will apply to the taxable profits of the branch. As the Jafza company has a branch in the mainland under the name LMN, the LMN will be considered a resident of the United Arab Emirates and its taxable profits will be subject to a 9% tax.
• Dividends and other profits distributions made by a Free Zone Person who benefits from the Zero Percent TC Regime to a Mainland UAE Shareholder of the Free Zone Person. This means that if the dividend will be paid and the profit will be distributed by the free zone person (who benefits from a zero percent CT regime) to a free zone person, then it will be zero percent. If the free zone person does not benefit from a zero percent TC regime or if a dividend is paid and/or a profit is not distributed to a free zone person, then the zero percent does not will not apply. As a DMCC company which benefits from a zero percent CT scheme pays dividends to a JAFZA free zone person, then zero percent WHT will apply.
Income derived from the UAE resident person, contracts and activities performed in the UAE, assets used in the UAE and rights used for economic purposes in the UAE will be considered income from the UAE. The law, once enacted, will provide detailed guidance for determining income from the UAE.
There will be no WHT in the UAE; businesses will not be required to levy tax on domestic and cross-border payments. Employers will not be required to withhold taxes from employee wages as there is no personal income tax. Companies/employers will not be required to file WHTs, nor will they be required to submit WHT statements.
The above shows that the CT diet is exceptionally flexible and that professional companies keep in mind the CT diets that work across the world. The CT scheme will not impede market growth; on the contrary, it will enhance transparency and lead to a stable economy.
Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official opinion but a personal opinion of the author based on the public consultation document on corporation tax. For any questions/clarifications, please write to him at firstname.lastname@example.org