Zero-Rated vs Exempt VAT in UAE: What’s the Difference?
February 24, 2025
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The UAE’s introduction of corporate tax has raised many questions for businesses, particularly those with international operations or revenue streams from foreign jurisdictions.
One of the key concerns is double taxation—where a company pays tax on the same income in both the UAE and another country.
To prevent this, the UAE allows businesses to claim foreign tax credits (FTCs), helping them reduce their overall tax burden while ensuring compliance with global tax regulations.
For multinational businesses, investment firms, and UAE-based companies with foreign subsidiaries or clients, understanding how foreign tax credits work is crucial.
If managed properly, FTCs can help businesses minimize tax liabilities, improve cash flow, and optimize international tax planning.
However, failing to claim tax credits correctly or misunderstanding UAE’s tax treaties could lead to unnecessary tax payments and compliance risks.
The UAE’s corporate tax framework is designed to prevent businesses from paying tax twice on the same income—once in the UAE and again in a foreign jurisdiction.
To achieve this, the Federal Tax Authority (FTA) allows companies to claim foreign tax credits (FTCs) for taxes already paid to another country.
This means that if a UAE-based business earns income from overseas operations, foreign investments, or cross-border transactions, it can offset the tax paid abroad against its UAE corporate tax liability.
Not all foreign taxes qualify for an FTC under UAE corporate tax law.
For businesses with operations in multiple countries, it is essential to track which foreign taxes are eligible for credits and ensure that tax filings in both jurisdictions reflect the same taxable income to avoid discrepancies that could trigger an audit.
While foreign tax credits can reduce UAE corporate tax liabilities, they are subject to certain limitations.
The UAE allows businesses to claim FTCs only up to the amount of UAE corporate tax payable on the same income.
This means that if a business pays a higher corporate tax rate abroad than the UAE’s 9% corporate tax, it cannot claim a refund for the excess tax paid.
For example, if a UAE company earns AED 1 million in taxable profits from a foreign subsidiary and pays 20% tax in that country (AED 200,000), it can only claim an FTC up to the UAE corporate tax liability (9% of AED 1 million = AED 90,000).
The remaining AED 110,000 paid abroad cannot be refunded or carried forward as a credit.
Foreign tax credits (FTCs) offer businesses a powerful way to minimize double taxation, but to fully benefit from them, companies must take a strategic approach to tax planning.
Simply knowing that an FTC exists is not enough—businesses must actively manage their tax positions, structure their operations efficiently, and ensure compliance with UAE tax laws and international tax treaties.
Businesses that generate revenue from foreign clients, overseas subsidiaries, or international investments must ensure that their income flows are structured in a way that maximizes FTC eligibility.
Income earned in high-tax jurisdictions should be structured to utilize tax treaties, legal tax exemptions, and corporate structuring techniques to minimize the total tax paid.
For example, a UAE-based company operating in a country with a 30% corporate tax rate should assess whether it can use a lower-tax jurisdiction within the same region for invoicing or operational functions.
If a company directly receives revenue in a high-tax country without optimizing the tax structure, it may pay more tax than necessary, especially if the foreign tax exceeds the 9% cap on UAE FTC claims.
Setting up regional holding companies or intermediary entities in jurisdictions with favorable tax treaties with the UAE can help businesses minimize foreign tax exposure and maximize eligible FTC claims.
However, these structures must be fully compliant with transfer pricing regulations and economic substance requirements to avoid scrutiny from tax authorities.
The UAE has signed more than 100 Double Tax Treaties (DTTs) with countries worldwide, helping businesses reduce or eliminate withholding taxes and corporate tax obligations in foreign jurisdictions.
Businesses should review tax treaties carefully to determine whether they can benefit from reduced tax rates or exemptions on dividends, interest, and royalties earned in foreign countries.
For instance, if a UAE-based company earns royalty income from a subsidiary in Europe, it may be subject to withholding tax in that country.
By referencing the UAE’s double tax treaty with that jurisdiction, the company may be able to reduce the withholding tax rate or eliminate it entirely, resulting in a lower total tax burden and a more efficient use of FTCs.
Companies should work with tax professionals to conduct a treaty benefit analysis, ensuring that they are correctly applying withholding tax reductions, FTC offsets, and corporate tax exemptions under UAE agreements.
To successfully claim FTCs in the UAE, businesses must maintain accurate tax documentation, payment records, and proof of foreign tax assessments.
Proper documentation is especially critical for businesses with multiple foreign tax exposures, as errors or missing records can result in FTC denials, tax reassessments, or penalties.
Implementing automated tax reporting systems can help businesses track foreign tax liabilities, compliance deadlines, and eligible FTC claims, ensuring that all required documents are ready for tax filings.
One of the most effective ways to maximize FTCs is by structuring business operations in a way that ensures all foreign taxes paid are eligible for credits.
Many businesses miscalculate their FTC eligibility because they do not properly align their legal entity structures, revenue recognition models, and international tax reporting practices with UAE corporate tax regulations.
For instance, a UAE-based parent company receiving dividends from a foreign subsidiary should ensure that withholding tax paid in the foreign country qualifies for a tax credit under UAE corporate tax rules.
If the company receives the dividend through an intermediary jurisdiction that does not have a favorable tax treaty, it may end up paying more tax than necessary without being able to claim the full FTC.
Businesses should also evaluate whether their corporate group structure allows them to consolidate foreign income effectively, ensuring that all eligible FTCs are utilized before income is taxed in the UAE.
This may involve adjusting where key revenue-generating activities occur, ensuring that tax-efficient jurisdictions are leveraged properly, and verifying that all intercompany transactions comply with transfer pricing regulations.
The timing of foreign tax payments and UAE corporate tax filings plays a crucial role in maximizing FTC claims.
If a business pays foreign tax in a different financial year than when UAE corporate tax is assessed, it may not be able to claim the full credit, leading to a higher effective tax rate than necessary.
For example, a UAE company that incurs corporate tax in a foreign country at the end of a financial year but only receives tax documentation months later could face delays in claiming its FTC, possibly missing deadlines or carrying forward unclaimed tax credits inefficiently.
Businesses should implement a structured tax payment strategy that ensures foreign tax liabilities are settled in a way that aligns with UAE tax reporting periods, avoiding mismatches that could lead to unused FTCs.
Foreign tax credits often become an issue when businesses repatriate profits from international subsidiaries, as these transactions trigger withholding taxes, local corporate tax obligations, and UAE tax implications.
Companies should assess whether their profit repatriation strategies align with tax treaty benefits and UAE tax credits, ensuring that the least amount of tax is paid while maintaining full compliance.
For example, instead of directly repatriating profits in the form of dividends, businesses may consider alternative tax-efficient mechanisms such as royalty payments, management fees, or intercompany financing structures, which may qualify for lower withholding tax rates or exemptions under UAE’s double tax treaties.
However, these strategies must be carefully documented and justified to comply with OECD transfer pricing rules, as tax authorities closely monitor transactions that shift profits between jurisdictions.
Companies should conduct periodic tax impact assessments to ensure that their profit repatriation structures remain tax-efficient while avoiding unnecessary scrutiny from tax authorities.
For businesses operating in multiple countries, managing foreign tax credits (FTCs) effectively requires a coordinated approach to tax reporting and compliance.
Each country has different tax rules, withholding rates, and treaty agreements, making it essential for companies to analyze their tax exposure across all jurisdictions.
Without proper planning, businesses risk losing eligible tax credits, overpaying taxes, or facing compliance issues in both the UAE and foreign markets.
One of the biggest challenges for UAE-based businesses is dealing with corporate tax rates that vary across different countries.
Some jurisdictions impose corporate tax rates above the UAE’s 9% threshold, while others offer low or zero-tax environments.
Businesses must assess how these differences impact the ability to claim FTCs and whether alternative tax strategies can help reduce overall tax exposure.
For example, if a company operates in a country with a 25% corporate tax rate, it will pay significantly more tax abroad than the maximum FTC allowed in the UAE (9%).
In this case, the business should evaluate whether it can restructure its revenue streams to ensure that income is allocated efficiently between jurisdictions.
This could involve reinvesting earnings in the foreign country, leveraging tax treaties, or shifting invoicing strategies to avoid excess tax payments that cannot be credited.
Conversely, businesses with operations in low-tax countries (below 9%) should ensure that their tax structures are compliant with UAE transfer pricing regulations and economic substance requirements.
The UAE tax authorities may closely examine transactions between UAE entities and those in low-tax jurisdictions to prevent artificial profit shifting.
For businesses engaged in cross-border trade, international service agreements, or global investments, FTCs should be integrated into overall tax planning strategies rather than treated as a simple deduction at the end of the tax year.
Companies should align tax credit claims with their broader financial goals, ensuring that their tax structures remain flexible and adaptable to future regulatory changes.
For instance, a UAE-based company with subsidiaries in Asia, Europe, and the Middle East should coordinate its tax strategy across all locations.
By centralizing regional financial management, optimizing dividend distributions, and structuring intercompany loans efficiently, businesses can maximize FTC benefits while maintaining compliance with local tax regulations.
One of the biggest challenges in managing FTCs is ensuring that tax filings in both the UAE and foreign jurisdictions are aligned.
Many companies struggle with timing differences in tax reporting periods, where tax payments made in one country do not match the UAE’s corporate tax filing deadlines.
If a foreign tax credit is not claimed within the correct financial year, businesses risk losing the opportunity to offset their UAE corporate tax liability, leading to unnecessary tax payments.
To address this, companies should implement a centralized tax compliance calendar that tracks foreign tax payment schedules, UAE filing deadlines, and tax treaty provisions.
This ensures that all eligible FTC claims are processed within the correct timeframe, avoiding the risk of expired credits or overlooked tax deductions.
Businesses with multiple revenue streams from foreign markets should work with tax specialists who can synchronize reporting timelines and ensure FTC claims are optimized for each jurisdiction.
Many countries impose withholding taxes on dividends, interest, and royalties, which can reduce a business’s total income before it is even taxed in the UAE.
If a business does not structure its international transactions correctly, it may end up paying taxes on the same income twice—once through foreign withholding tax and again through UAE corporate tax.
To minimize withholding tax exposure, businesses should evaluate whether they qualify for reduced withholding tax rates under the UAE’s double tax treaties (DTTs).
Many treaties allow for lower tax rates or exemptions on cross-border payments, ensuring that businesses retain more of their foreign income while still complying with tax regulations.
Companies that rely on foreign royalties, licensing fees, or interest income should review their contractual arrangements to determine whether restructuring payment flows or invoicing entities differently can reduce withholding tax liabilities.
Not all foreign taxes qualify for FTCs, and businesses that misclassify taxes or claim ineligible credits may face compliance risks in the UAE.
Some countries impose industry-specific levies, business license fees, or other indirect taxes, which may not be recognized as a corporate income tax under UAE tax law.
If a business mistakenly includes these in its FTC claim, it could result in tax adjustments, penalties, or denied deductions from the UAE Federal Tax Authority (FTA).
To avoid this, companies should conduct a detailed tax classification review for each jurisdiction where they operate.
Working with international tax advisors ensures that foreign tax payments are categorized correctly, eligible FTCs are identified, and potential mismatches between UAE and foreign tax laws are resolved proactively.
Businesses that regularly deal with cross-border tax obligations should maintain detailed records of tax payments, legal justifications, and relevant documentation to support their FTC claims in case of an audit.
Rather than treating FTCs as a year-end deduction, businesses should integrate them into their corporate tax planning strategy to ensure maximum tax efficiency.
Companies expanding into new foreign markets should assess how local tax rates, withholding tax policies, and available treaty benefits impact their total tax liability before setting up operations.
Structuring subsidiaries, joint ventures, and investment holdings in tax-efficient locations can significantly reduce the amount of foreign tax paid, maximizing the benefits of FTCs.
Businesses should also consider whether they can allocate income streams across different entities in a way that aligns with UAE corporate tax laws and foreign tax obligations.
For example, if a company earns revenue from multiple countries, it may be able to shift certain operations, such as intellectual property (IP) ownership or financing activities, to jurisdictions with more favorable tax treatment.
However, any restructuring must comply with OECD transfer pricing rules and UAE economic substance regulations to avoid tax disputes.
As the UAE continues to refine its corporate tax regulations, businesses must stay informed about potential policy changes, international tax developments, and updates to double tax treaties (DTTs).
The global tax landscape is evolving, and companies that proactively adjust their foreign tax credit (FTC) strategies will be better positioned to reduce tax liabilities and maintain financial efficiency.
The introduction of the OECD’s Global Minimum Tax (GMT) under Pillar Two is set to change how multinational corporations manage tax obligations across different jurisdictions.
Large companies with global revenues exceeding EUR 750 million will be required to pay a minimum 15% corporate tax, regardless of where they operate.
For UAE-based multinational enterprises, this means that foreign tax credits may become even more critical in reducing overall tax exposure.
Businesses that currently operate in low-tax jurisdictions may need to reassess their FTC strategies to ensure they are maximizing tax relief while complying with international tax rules.
Companies should conduct global tax impact assessments, ensuring that they are optimally structured to minimize tax burdens across multiple countries.
The UAE’s extensive network of tax treaties plays a crucial role in minimizing withholding taxes and optimizing FTC claims.
However, as international tax regulations evolve, businesses must monitor any amendments to existing treaties or new agreements that may affect their tax positions.
For instance, some countries may revise their withholding tax rates on dividends, interest, and royalties, affecting FTC calculations for UAE businesses with foreign income streams.
Keeping up with these changes allows businesses to adjust their tax structures proactively, renegotiate contracts, and optimize profit repatriation strategies to maintain tax efficiency.
To fully leverage FTCs, businesses must treat them as part of a long-term tax strategy rather than a short-term deduction.
Companies that invest in strong tax governance, automated tax reporting, and cross-border tax expertise will be better prepared for regulatory changes and global tax compliance challenges.
Setting up internal tax compliance frameworks, conducting annual tax audits, and leveraging technology for real-time FTC tracking ensures that businesses can optimize their tax liabilities year after year.
Working with UAE corporate tax specialists can also help companies identify additional tax-saving opportunities, ensuring they remain compliant, competitive, and financially strong in an increasingly complex tax environment.
Foreign tax credits are a powerful tool for reducing double taxation and optimizing corporate tax efficiency.
However, businesses must take a proactive and well-structured approach to ensure they are maximizing eligible FTC claims while remaining fully compliant with UAE tax laws.
By strategically managing cross-border income, leveraging double tax treaties, structuring intercompany transactions efficiently, and maintaining robust tax documentation, companies can significantly reduce their overall tax burden.
As tax regulations continue to evolve, businesses that stay ahead of policy changes and integrate FTCs into their long-term tax strategy will have a clear advantage.
For businesses seeking expert guidance on foreign tax credits, corporate tax planning, and cross-border tax compliance, Protax Advisors provides specialized tax advisory services tailored to UAE-based companies.
Whether you need help with global tax structuring, FTC optimization, or corporate tax compliance, our team is here to support your business every step of the way.
Schedule a consultation call and learn how our expertise in accounting and tax services can benefit your business.