How To Compute Your Tax Liability Under UAE Corporate Tax
- What corporate tax rate would apply to business profits?
- How the profit will be calculated for determining corporate tax liability?
- What adjustments are made to the profits?
- Are there any restrictions on expenses that can be deducted from business revenues?
- How to calculate taxable income under UAE corporate tax?
Since the tax authorities of the United Arab Emirates have announced the introduction of corporate tax starting from 1st June 2023 in the UAE, these are some of the common questions bothering many business owners.
One of the biggest concerns among business owners is calculating the taxable income once the corporate tax comes into force. Although you can reach out to corporate tax advisors in the UAE to help you accurately compute your tax liability, it is critical for you to understand the rationale behind the calculation.
Here is our attempt to help you understand how to calculate your taxable income under the new corporate tax regime.
Important Things To Note To Determine Your Corporate Tax Liability
Before we jump to the tax calculation part, you need to note a few important aspects of corporate tax to determine your tax payable.
The corporate tax rate applicable to businesses in the UAE is as follows:
Corporate Tax Rate
|Up to AED 375,000||Nil|
|Above AED 375,000||9%|
Corporate tax will be levied on the annual taxable income of a business.
Businesses must use the accounting net profit or loss as stated in their financial statements as a starting point for determining their taxable income.
What is Accounting Profit and How to Calculate It?
Accounting profit is the profit earned by an entity and that is shown in its financial statements.
For determining accounting profit, financial statements must be prepared in accordance with the accounting standards and principles. Adoption of accounting standards and principles reduces compliance costs and complexity. Furthermore, it also lends a common definition of income and a base as per the international standards that are accepted in the UAE. It also prevents businesses from maintaining different sets of records for financial reporting purposes and corporate tax purposes.
While most businesses in the UAE adopt the International Financial Reporting Standards for preparing their financial statements, for start-ups and small businesses, alternative financial reporting standards and mechanisms are also available for determining taxable income.
Businesses must use the financial accounting period as the (annual) tax period. Businesses that do not have a financial accounting period need to use the Gregorian calendar year as their default tax period.
Foreign Tax Credit
To avoid double taxation, the corporate tax regime allows you to claim a foreign tax credit for the tax paid in a foreign jurisdiction against the UAE corporate tax liability on the foreign sourced income that has not been otherwise exempted.
The maximum foreign tax credit that you are allowed to claim is lower of the amount of tax that was paid in the foreign jurisdiction; or the tax payable on the foreign sourced income.
If you do not utilise the foreign tax credit in the respective taxable period, you are not allowed to carry forward it to the subsequent financial periods. Additionally, FTA is not supposed to return unutilized foreign tax credits.
Calculating Your UAE Corporate Tax Liability
The public consultation document issued by the UAE Ministry of Finance (MoF) outlines the details of calculating UAE corporate tax liability, which is as follows:
Amount (In AED)
|Net Profit / loss as per the financial statement||xx|
|Add / Less: Adjustments as per the corporate tax legislation||xx|
|Taxable Income up to AED 375,000||@0% (A)|
|Taxable Income above AED 375,000||@9% (B)|
|Corporate Tax Liability||A + B|
|Less: Foreign Tax Credit||xx|
|Corporate Tax Payable||xx|
Example of UAE Corporate Tax Liability Calculation
Let us assume the following:
Taxable income – AED 1,050,000
Foreign Tax credit – AED 5,000
Tax calculation will be as follows:
Corporate Tax Liability = (1,050,000 – 375,000) x 9% = AED 60,750
Corporate Tax Payable = 60,750 – 5,000 = AED 55,750
As seen from the above illustration, the UAE corporate tax calculation is quite simple. Having said that, businesses often have complex business transactions where expert assistance can prove to be very useful. In such complicated scenarios, you may seek assistance from corporate tax consultants in Dubai, UAE.
Exempt Incomes Under the UAE Corporate Tax
UAE resident companies are going to be subject to UAE Corporate Tax on their worldwide income, including capital gains. However, to avoid double taxation instances, certain incomes are exempted from the calculation of corporate tax. The exempted incomes include:
Dividends and Capital Gains
- Dividends received and capital gains earned from the sale of shares of a subsidiary.
- Dividends received from foreign companies
- Domestic dividends earned from UAE companies
- Dividends received from UAE Free Zone companies (even if the income of such companies is subject to nil corporate tax rate).
- Capital gains from the sale of shares in both UAE and foreign companies will be exempt subject to the following two conditions:
– The recipient shareholder holds at least 5% of the shares of the subsidiary, and
– A foreign subsidiary is subject to at least 9% corporate tax.
Profits from Foreign Branches
A foreign branch would mean a permanent establishment in the foreign country that is subject to corporate tax (or an equivalent tax) on its profits in that foreign country.
UAE companies with foreign branch / branches may choose either of the below mentioned options for their foreign branch profits:
– Claim foreign tax credit for taxes paid in the foreign branch country, or
– Elect to claim an exemption for their foreign branch profit (tax rate in the jurisdiction should be equal to or more than UAE corporate tax rate).
The option once chosen, cannot be revoked.
Leasing or Operating Aircraft or Ships
Income earning by way of leasing or operating aircraft or ships is exempt from the purview of corporate tax if the following conditions are fulfilled:
- Such income is earned by a non-resident
- The leased aircraft or ship or any associate equipment is used for international transportation (with a reciprocal arrangement from foreign jurisdiction).
Contact Aviaan Accounting – The Best Corporate Tax Consultant in Dubai, UAE
Understanding how to calculate your taxable income under the UAE corporate tax regime will help you to be better prepared for the journey ahead.
We understand the initial hiccups and challenges faced by businesses in the UAE. Therefore, we are there to assist you at every stage of your corporate tax journey.
Seeking help from a professional corporate tax advisory firm in Dubai, UAE like Aviaan Accounting will enable you to accurately assess the potential impact of corporate tax on your business and how to implement it in a smooth and hassle-free manner while ensuring that your business, processes and teams are not impacted.
Our corporate tax team comprises of highly skilled professionals who can help you smoothly sail through the corporate tax journey and ensure timely compliance.