All Taxable Persons (including Free Zone persons) are required to register for Corporate Tax and obtain a Corporate Tax Registration Number. UAE Corporate Tax is imposed on the taxable income earned by a Taxable Person in a Tax Period. UAE Corporate Tax is imposed on an annual basis, and the Corporate Tax liability is calculated by the Taxable Person on a self-assessment basis. According to this, the calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the FTA by the taxable person. This article deals with explaining how to calculate the taxable income under the UAE Corporate Tax Law.
When you are in the process of calculating the taxable income under the UAE Corporate Tax law, you have to first adjust your accounting income or your net profit, which you have reported in financial statements, based on certain specific tax rules. Under this process, one starts with the net profit or loss, adds the non-deductible expenses, deducts income exempt under corporate law, adjusts for gains or losses, and then applies a 9% rate to the taxable income exceeding AED 375,000.
Important steps involved in calculating taxable income under corporate tax law
Step 1: Find out the Accounting Income: Begin with the net profit or net loss before tax as per the company’s financial statements.
Step 2: Adjusting the Non-Deductible Expenses: Add again all the expenses that are not allowed for tax purposes, such as fines, certain entertainment expenses or personal expenses.
Step 3: Deduct the Exempt Income: Income that has been declared as exempt under the UAE Corporate Tax Law must be reduced. Some examples of such income include dividends from UAE entities or profits from a foreign branch.
Step 4: Adjust for Asset Transfers and Transactions: Apply the various adjustments for unrealized gains/losses, and ensure transactions with related parties are available for reference.
Step 5: Apply the Tax Deductions: You can now apply permissible tax deductions, such as depreciations over here.
Step 6: Final Taxable Income Calculation:
Taxable Income=Accounting Net Profit+Non-Deductible Expenses−Exempt Income±Other Adjustments
(Taxable Income equals Accounting Net Profit plus Non-Deductible Expenses minus Exempt Income plus or minus Other Adjustments)
Specific Corporate Tax Rules and Thresholds:
- Tax rate: Typically, a standard 9% rate is applied to taxable income
- 0% Tax Threshold: Taxable income less than AED 375,000 is subject to 0% tax rate
- While businesses that have a revenue of up to AED 3 Million can use the cash basis of accounting, businesses with higher revenue require the accrual basis (IFRS) of accounting
- Qualifying Free Zone persons have specific rules that are applied to them, and they may benefit from a 0% rate on qualifying income
- The UAE corporate tax period is usually the financial year of the business
Example to calculate taxable income under UAE corporate tax law
Here is an example to calculate the Taxable Income under the UAE Corporate Tax Law:
Let us say that there is a services company that has an accounting profit of AED 1,000,000 for the financial year. When a review was done, the accounting team found that AED 40,000 of costs were booked under “staff welfare” - these costs related to a personal owner event. Hence, this cost was adjusted. The accounting team also found that AED 12,000 of supplier invoices were posted without the proper documentation. Therefore, this was held out until complete evidence was retrieved.
The working for this is:
Starting profit: AED 1,000,000
Add personal cost: AED 40,000
Add unsupported invoices cost: AED 12,000
Revised taxable income: AED 1,052,000
Taxable income in the UAE is simpler when the books are clean and every adjustment has proof. Referral income taxable in the UAE and foreign-owned structures can create minor gaps that can later turn into massive delays. Therefore, it always helps to review the books early on so these can easily be identified and worked on.
