This article outlines the criteria for determining if income is sourced from the UAE and qualifies as State Sourced Income. The rules primarily pertain to the taxation of Non-Resident Persons, whereas Non-Resident Persons who receive income sourced from the UAE but are not considered Resident Persons are subject to taxation on their State Sourced Income. Therefore, to effectively determine State Sourced Income in compliance with the Corporate Tax Law in UAE, Taxable Persons are advised to consult Tax Consultants in UAE.
What is State Sourced Income?
The definition of State Sourced Income is broad and encompasses income earned from Resident Persons or derived from activities or assets situated in the UAE. For instance, dividend income is considered sourced in the UAE when the payer of the dividend is a resident of the UAE for Corporate Tax purposes. The scope of State Sourced Income may include income specified in an implementing decision that is subject to Corporate Tax, such as Withholding Tax.
Criteria for Identifying State-Sourced Income
The characterization of income as income from Business or Business Activity does not negate its classification as State Sourced Income or the application of Withholding Tax. The Explanatory Guide for corporate tax purposes establishes the fundamental criteria for identifying State Sourced Income. It stipulates that any income received by a Non-Resident Person from a Resident Person is considered State Sourced Income.
This clause specifies that the income must be derived from a Person who falls within the purview of Corporate Tax in UAE as a Resident Person. A Resident Person would be allowed a deduction if the income represents an expenditure incurred for the purpose of generating Taxable Income. However, an exception to the general rule applies when an amount received represents an expenditure of a Business conducted by the Resident Person outside the UAE through a Foreign Permanent Establishment.
Furthermore, an amount received by a Non-Resident Person from another Non-Resident Person will also be considered State Sourced Income to the extent that it is attributable to a Business or Business Activity conducted by that other Non-Resident Person through a Permanent Establishment in the UAE. The Non-Resident Person would generally be eligible for a deduction if the amount paid represents an expenditure incurred for the Business or Business Activity conducted through its Permanent Establishment in the UAE.
The UAE considers income derived from activities, assets, capital investment, rights usage, or services performed or benefited from within the UAE as State Sourced Income. This means that regardless of the location and residence of the person receiving the income, it can be considered to have a UAE source for corporate tax purposes if the income-generating activity, tangible or intangible assets, or the place of use or performance of the income are located in the UAE.
Determinants of State-Sourced Income
Income from the sale of goods: Generally, the income is sourced to the location where the sale takes place and the transfer of title occurs.
Income from services: Income from services is typically considered State Sourced Income if the service is rendered in the UAE or if the ultimate recipient or beneficiary of the service is located in the UAE. The ultimate recipient is the person who economically utilizes the service within the UAE.
Income from a contract: Income from contract performance is generally sourced to the place where the contract is performed or where the ultimate recipient or beneficiary of the contract performance is located. This does not cover employment contract income or income from contracts involving movable or immovable property, which are sourced based on the property's location.
Income from movable or immovable property: Income arising from the use or sale of tangible property is sourced to the location of the property. For instance, rental income from property in the UAE or income from an interest in such property is considered State Sourced Income.
Income from the disposal of shares or capital rights: Capital gains and other income from the sale of shares or rights in the capital of a legal entity are sourced to the UAE if the entity is incorporated or resident there for corporate tax purposes.
Income from intellectual or intangible property: Regardless of the payor and recipient's location and residence for corporate tax purposes, payments made for the use, right to use, or granting of permission to use patents, trademarks, trade brands, copyrights, goodwill, and other intangible or intellectual property in the UAE are generally sourced to the UAE.
Interest income: Interest income is sourced to the UAE if it is paid by a resident person or government entity. Interest may also be considered State Sourced Income if the collateral securing the relevant loan or financing arrangement is located in the UAE.
Insurance income: Similar principles to interest income apply when determining the source of insurance or reinsurance premiums. They are considered State Sourced Income if the insured person is a resident or if the insured asset or activity is located in the UAE.
Avail the Services of Tax Consultants in UAE
To effectively determine State Sourced Income in compliance with the Corporate Tax Law, Taxable Persons are advised to consult Tax Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.