Tip To Understanding Corporate Tax Calculation in the UAE

The United Arab Emirates (UAE) will soon introduce a corporate tax on business revenues at statutory rates of 0% and 9%. This significant change marks a departure from the UAE’s well-established tax-friendly status, although the UAE’s corporate tax rates remain highly competitive compared to global norms. This move reflects the UAE’s commitment to maintaining its position as a premier business epicenter. As eligible companies prepare to register and file for corporate tax, this guide offers a precise overview to help simplify the UAE corporate tax calculation process.

What is a Corporate Tax?

The corporate tax is also known as the corporate income tax or business profits tax. This is directly imposed on the net revenue of enterprises and companies. By embracing this taxation model, the UAE joins the list of various countries across the globe that have already incorporated corporate tax frameworks. According to the UAE Tax Guidelines, unless exempted, taxable income of more than AED 375,000 will be subject to a 9% statutory tax rate. Below this threshold, no tax will be imposed. 

Before this tax can be assessed, all eligible businesses must complete corporate tax registration with the FTA, which is a legal obligation under UAE tax law.

Consider Adjustments While Corporate Tax Calculation

While calculating Corporate Tax in the UAE, you are required to look after specific adjustments to conclude your taxable income. Here are some of the most vital adjustments for the same:  

1. Deductible Expenditures 

Knowing about the company expenses that you can cut down from your profits to minimize the taxable income is critical. 

• Deductible Expenses: It’s important to know which business costs you can subtract from your profits to lower your taxable income. These deductible expenses include things like rent, employee salaries, utilities, and depreciation.

• Limitations on Deductions: Remember that not every expense can be fully deducted or cut down. For example, you can only deduct 50% of entertainment costs, which must be for clients, suppliers, or other business partners. Interest expenses can be deducted only up to 30% of your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). 

• Non-deductible Expenses: Some expenses cannot be deducted at all, such as fines, penalties, dividends, personal expenses, and taxes from outside the UAE.

2. Tax Loss Relief

The topic of tax loss relief is a vital factor in how the corporate tax calculation is done in the UAE. Here are some simplified arguments you must know: 

• Tax Loss Relief: According to UAE law, if your business has a tax loss in one tax period, you can use that loss to offset taxable income in future periods. This can help lower your corporate tax bill. This supports reducing your taxable income. 

• Limitations: There’s currently no limit on how long you can carry forward these losses, but you can only offset up to 75% of your taxable income in any given year. This ensures that businesses benefit from tax loss relief without misusing it.

3. Unrealized Gains or Losses 

Unrealized gains or losses are referred to as the fluctuations in the value of assets, such as property that hasn’t been sold yet. Let’s understand it in detail: 

• Unrealized Gains: These are increases in the value of an asset that you haven’t sold yet. For instance, if you buy shares for AED 200 each and their value goes up to AED 250, that’s a gain of AED 50 per share.

• Unrealized Loss: If you buy an asset for AED 150,000 and its value drops to AED 135,000, that’s a loss of AED 15,000. Therefore, it refers to the decrease in the value of the assets. 

In the UAE, you only account for these gains or losses when you sell the asset. Until then, they aren’t taxed or deductible.

4.  Exempt Income

Having a comprehensive knowledge of exempt income is important for corporate tax calculation in the UAE: 

• Exempt Income: Certain types of income are not subject to corporate tax in the UAE. This includes personal income, foreign earnings, income from investments, real estate, and businesses in free zones.

• Group Relief: Companies in the UAE that share at least 75% ownership can transfer assets and liabilities within their group without incurring tax, as long as these assets remain within the group for at least three years.

5. Small Business Relief

• Eligibility: Small Business Taxation in the UAE differs from that of large businesses. Small businesses can benefit from tax relief if their revenue is under AED 3 million for the current and previous tax periods. If your revenue exceeds this limit, you lose this benefit. However, once your profit crosses the AED 3 million threshold in any tax period, you will not be eligible for this relief. 

• Time Frame: This AED 3 million threshold applies to tax periods from June 1, 2023, until December 31, 2026.

• Exclusions: If you are part of a larger multinational group or qualify as a Qualifying Free Zone Person, you can’t use small business relief.

• Carry Forward: If you don’t claim Small Business Relief in any period, you can carry forward any tax losses or net interest expenses to future periods.

Conclusion 

By understanding the UAE Corporate tax guidelines, you can navigate the new tax landscape in the UAE more effectively. If you require any support or help with corporate taxation and expense management, reach out to Hisab Taskmaster CA Advisor for corporate tax calculations. With in-depth and adequate knowledge of UAE taxation, we can streamline your business taxes with the utmost accuracy and precision. 

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