Think that you’re running a small but growing MSME business in Dubai. Things are going well, like you are getting new clients, have better employees, a steady cash flow, and more. Sounds amazing, right? However, suddenly you started to hear talk regarding “corporate tax”, “qualifying free zone person”, and “transfer pricing”. This may seem like someone speaking in coded language.
You’re not alone. Understanding the terminology has been critical since the UAE implemented its corporate tax regime (starting June 1, 2023). This is not only important for compliance, but also for making wise financial decisions.
Gaining in-depth knowledge will make compliance simpler and help in preventing costly mistakes, whether you’re planning for the next financial year or filing your corporate tax return. This article discusses 20+ must-know terminologies for UAE corporate taxpayers. It also highlights how TallyPrime is useful in keeping track of these tax terms. So, you always stay compliant with the UAE Corporate Tax Law and grow your business.
Why is understanding corporate tax terminologies crucial?
Before talking about the terminology list, let’s first learn why its knowledge is important for every business owner:
- Compliance accuracy: You can avoid fines and delays by knowing the correct terminology.
- Improved planning: Your tax liability is directly influenced by terms such as qualifying income or small business support.
- Easy audits: You can stay updated by knowing the legal terms most commonly used by tax authorities and auditors.
- Confidence: When you know the meaning of corporate tax in the UAE, you can make better judgments rather than depending on just guesswork.
List of 25 must-know terminologies for UAE corporate taxpayers
1. Corporate tax: The tax that is imposed on the net profits of a business. Profits over AED 375,000 are subject to 9% corporation tax in the UAE. In contrast, profits under the mentioned amount are taxed at 0%.
For example, if your business makes AED 500,000 in profit, you will pay 9% tax on the additional AED 125,000.
2. Taxable income: This is the sum of profit on which your corporate tax is calculated.
- Taxable Income = Total Revenue – Allowable Deduction
3. Exempt income: It refers to certain types of income that are excluded from corporate tax to encourage investment. Example includes:
- Dividends from qualifying shareholdings.
- Capital gains from selling shares.
- Profits earned by foreign branches taxed abroad.
4. Tax period: The twelve-month period a business uses for tax reporting, usually aligned with its financial year. Note that if the financial year ends on December 31, your first corporate tax period begins on January 1.
5. Tax return: The formal report that companies are required to provide to the Federal Tax Authority (FTS) that lists their earnings, outlays, and taxes owed. After the end of the tax period, this must be submitted within nine months. The UAE corporate tax return format PDF can be downloaded from the FTA portal.
6. Taxable threshold: The profit limit after which corporate tax applies. In the UAE, this threshold is AED 375,000. Below this is taxed at 0%. This makes it easier for small businesses to grow.
7. Tax residency: Determines whether a company is treated as a UAE resident for tax purposes. Generally, companies that are incorporated in the UAE are automatically residents. If a foreign business is run from the United Arab Emirates, it may also be considered a resident.
8. Resident person: A legal entity considered a tax resident under the UAE Corporate Tax Act. Tax residents are generally taxed on their global income.
9. Non-resident person: It is considered to be the business or individual that generates revenue from the UAE, such as through a Permanent Establishment (PE), but does not fit the requirements for UAE tax residency.
10. Permanent Establishment (PE): An actual place of business where a non-resident does business in the United Arab Emirates. For example, a construction site that stays longer than six months, a branch office, and so on.
11. Free Zone Person (FZP): Companies that are registered in a UAE Free Zone come under this. Even if they are eligible for 0% tax based on specific income categories, businesses operating in free zones are still subject to corporate tax legislation.
12. Qualifying free zone person (QFZP): An FZP that satisfies specific requirements can benefit from a 0% tax rate on eligible income. However, there are certain conditions, such as earning only qualifying income and maintaining sufficient resources, including employees and operational expenses.
13. Qualifying income: Revenue received by a QFZP from operations that are free from taxes under UAE law. These generally include exporting goods to other foreign markets, and others.
14. Non-qualifying income: It includes companies that do not meet the criteria for 0% tax, and they are taxed at the standard 9% rate.
15. Small business relief: Businesses that fall under specific revenue levels are eligible for relief. It allows small companies to reduce their tax obligations and simplify compliance.
16. Transfer pricing: Regulations that guarantee connected parties’ transactions are carried out at fair market value. It stops profit shifting to evade taxes and requires appropriate documentation, which TallyPrime can assist in creating.
17. Arm’s length principle: Transfer pricing is based on the idea that deals between related parties ought to be valued similarly to those between separate companies.
18. Deductible expenses: Costs that can be deducted to determine taxable income, such as wages and salaries, utilities and office rent, travel costs associated with business, and others.
19. Non-deductible expenses: These include expenses that cannot be deducted when calculating taxable income. For example, personal expenditures of business owners, penalties and fines, entertainment expenses beyond allowed limits, and others.
20. Tax group: Instead of submitting separate corporation tax returns, two or more businesses under common control file a single corporate tax return.
21. Withholding tax: A tax withheld at the source of some cross-border payments to non-residents, such as dividends or royalties. Because of its 0% withholding tax rate, the UAE attracts investors from all over the world.
22. Business activity code: When registering your business with the FTA, a code is assigned to you. It is provided based on the type of business you're doing.
23. Tax registration number (TRN): Once you register your business for corporate tax in the UAE, the unique number is provided to you. Remember that this number is extremely important for filing tax returns or any other official documents.
24. Corporate tax rate: When your income falls under the taxable slot, the standard rate gets applied.
25. Federal Tax Authority (FTA): The government body that is in charge of executing and enforcing tax laws. That also includes overseeing the filing of corporate taxes.
The corporate tax structure in the UAE is constantly evolving, and the only way to prevent non-compliance is to be educated about it. Having in-depth knowledge about these crucial terminologies is crucial for taxpayers in the UAE. It increases your confidence level for managing filings, audits, and, importantly, in strategy planning. You can use TallyPrime, as it will make the entire process smooth for you, including tracking income and producing tax-compliant reports.
