Corporate Tax

Guidelines for Taxable Income under UAE Corporate Tax Law

The introduction of corporate tax in the United Arab Emirates (UAE) marks a significant shift in the nation’s taxation landscape, as businesses are now required to calculate their taxable income under new regulations. Effective June 1, 2023, the UAE Corporate Tax Law aims to establish a transparent and structured framework for taxation applicable to companies and individuals engaging in commercial activities.

This reform signals the UAE’s growing alignment with global tax standards while maintaining its commitment to fostering an attractive business environment. The guidelines for calculating taxable income are central to ensuring compliance and understanding tax obligations under this new regime.

These guidelines help businesses navigate the intricacies of determining their taxable income. Key considerations include the treatment of revenue, allowable deductions, and losses, among other specific adjustments prescribed by the law.

By adhering to these standards, companies can ensure they accurately calculate their taxable income, avoid potential penalties, and foster long-term tax planning strategies. This article will provide a detailed breakdown of the essential aspects of calculating taxable income under UAE Corporate Tax Law, highlighting crucial steps for businesses to remain compliant.

Understanding Corporate Tax Framework in the UAE

The UAE’s corporate tax rate is 9%; however, the computation process is not straightforward. The 9% Corporate Tax applies only when the taxable net profit is over 375,000 AED. Put simply, any net profits below 375,000 AED will not be subject to tax.

The law includes particular rules for companies in free zone operations. If a taxpayer is labelled a Qualified Free Zone Person (QFZP), they must follow distinct tax regulations. QFZPs receive tax advantages, such as a 0% tax rate on eligible earnings, as outlined in the UAE CT legislation.

However, companies on the UAE mainland must pay a flat tax rate of 9% on their earnings above AED 375,000. Mainland companies are free to do business locally and internationally, unlike free zone companies, which face limitations.

However, confidently register your company in Dubai to navigate your corporate tax law benefits for a prosperous future.

How does CT Calculation Work by Using a Specific Example?

Consider the example of an XYZ Corp. business operating in the United Arab Emirates. In its financial statements for the fiscal year 2023-2024, XYZ Corp. discloses a net profit of AED 500,000. This is the total after deducting all relevant amounts and excluding exempt income.

To calculate corporate tax, the initial step is to establish whether the company’s taxable income is higher than AED 375,000. In this situation, XYZ Corp.’s earnings of AED 500,000 exceed the exemption limit.

Then, we deduct the threshold quantity from the net profit to determine the taxable income. Therefore, XYZ Corp. would have a taxable income of AED 125,000, calculated as AED 500,000 minus AED 375,000.

Next, we calculate the taxable income using a Corporate Tax rate of 9%. Therefore, XYZ Corp. would pay AED 11,250 as Corporate Tax, calculated at a rate of 9% on AED 125,000. Therefore, XYZ Corp. is responsible for settling a Corporate Tax of AED 11,250 for the fiscal year 2023-2024.

Adjustments While Calculating Corporate Tax

When determining Corporate Tax in the UAE, it is important to make specific modifications to establish your taxable income for the relevant period. Now, we will examine some of the key changes.

Deductible Expenditures

It is important to comprehend which business expenses can be deducted from your profits to lower taxable income.

• Deductible Expenses: Deductible expenses are costs related to your business that are necessary to earn taxable revenue. Examples include rental fees, employee wages, essential services, decreases in value, and gradual expense write-offs.

Deduction Restrictions

It’s important to remember that not all costs can be fully deducted. Some deductions, such as those for entertainment and interest expenses, have restrictions.

• Entertainment Expenses: Only 50% of entertainment expenses can be deducted. Costs must have been spent on customers, shareholders, suppliers, or other business partners to be eligible for tax deduction.
• Interest Costs: Businesses can deduct up to 30% of their EBITDA net interest costs. The deduction must adhere to the EBITDA rules established by the OECD’s Base Erosion and Profit Shifting Project Action 4.

Expenses that are not deductible

Some expenses are not eligible for deductions. These comprise fines, penalties, dividends, personal expenses, and taxes enforced externally from the UAE.

Tax Loss Relief

Tax loss relief is a significant factor in calculating corporation tax in the UAE. Here are a few essential points you need to be aware of:

• Tax Loss Relief: Per Article 37 of the Corporate Tax law in the UAE, if your company experiences a tax loss in one tax period, you can use this loss to reduce the taxable income in future periods. This rule helps lower your taxable income and decreases your business’s Corporate Tax liability.
• Limitations: There are no restrictions on the period for which losses can be utilized for tax purposes. However, you must apply any tax loss from previous periods against the taxable income in the next period. You can only consider carrying forward any remaining tax loss to the next period after that.

The existing regulations dictate that the amount of tax loss used to reduce taxable income cannot exceed 75% in a single tax period. This regulation guarantees fairness by enabling businesses to access the advantages of Tax Loss Relief without exploiting the system.

Unrealized Gains or Losses

Unrealized gains or losses refer to fluctuations in the value of assets, like real estate, that have not been realized through a sale. Let’s analyze how this impacts a company’s tax liability.

• Unrealized Gain: When the value of an asset or investment increases but has not yet been converted to cash, it is considered an unrealized gain. For instance, if your organization purchased shares at AED 200 each and the value increases to AED 250 each, you would have an unrealized profit of AED 50 per share.
• Unrealized Loss: A drop in the worth of an asset or investment that has not been realized in cash. If your company bought office space for AED 150,000 and the value drops to AED 135,000, your business incurs an unrealized loss of AED 15,000.

In the UAE, your business has the option to acknowledge these profits or losses for tax purposes only once they are incurred, such as when the asset is sold. This implies that gains that have not been realized do not incur taxes, and losses that have not been realized cannot be deducted until they are realized.

Exempt Income

Understanding the various income types excluded from UAE Corporate Tax is also essential when calculating corporation tax.

• Exempt Income: Certain types of income are not considered for Corporate Tax purposes and are referred to as Exempt Income. This comprises personal income, income from overseas, earnings from investments, rental income, enterprises established in free trade zones, and enterprises engaged in natural resource extraction.
• Group Relief: Under corporate tax rules, Group Relief allows relief for transfers of assets and liabilities within the same group of UAE resident companies with a minimum of 75% common ownership. This clause helps improve corporate groups’ financial operations with strong connections. To qualify for relief, the assets and liabilities must stay within the same group for at least three years.

Small Business Relief

The Small Business Relief provision in the UAE Corporate Tax Law aims to help startups and small or micro businesses by lowering their Corporate Tax burden and compliance expenses.

• Eligibility: If your revenue is not more than AED 3 million in the current and past tax periods, you are eligible for the Small Business Relief as a resident taxable person. This implies that your business will be viewed as not earning any taxable income during a specific tax period if the revenue is below the threshold. However, if your earnings surpass AED 3 million during a tax period, you will no longer qualify for this exemption.
• Time Frame: The AED 3 million revenue cap applies to tax periods beginning June 1, 2023 or later. It applies to all future tax periods ending on or before December 31, 2026.
• Exclusions: Individuals categorized as Qualifying Free Zone Persons (QFZP) or members of a Multinational Enterprises Group (MNE Group) referenced in Cabinet Decision No. 44 of 2020 are ineligible for Small Business Relief. An MNE Group is a group of companies operating across borders with over AED 3.15 billion combined revenues.
• Carry Forward: If you decide not to utilize Small Business Relief for specific tax periods, you can carry forward any disallowed Tax Losses or Net Interest Expenditures. You can utilize them in upcoming tax periods when Small Business Relief is not opted for.

Conclusion

The UAE Corporate Tax Law has introduced a comprehensive framework for calculating taxable income, emphasizing transparency, fairness, and alignment with international tax standards. Businesses operating in the UAE must understand the inclusions, exemptions, deductions, and transfer pricing rules to ensure compliance with the law and optimize their tax liabilities.

Proper tax planning and record-keeping, combined with an understanding of allowable deductions and exemptions, are essential for businesses to minimize their tax burden while adhering to the regulations. By following the guidelines provided under the UAE Corporate Tax Law, businesses can ensure accurate calculation of taxable income and avoid penalties for non-compliance. Visit our website https://enterslice.com/ and transform your tax challenges into opportunities by exploring the UAE corporate tax landscape to elevate your business to new heights today.

FAQ’s