With the arrival of Corporate Tax, the United Arab Emirates’ economy has recently moved into a new phase. From June 2023 on, most companies in the UAE will have to figure out and pay their corporate tax based on their taxable income. To stay in compliance, avoid penalties, and make sure your business gets the tax breaks it’s legally entitled to, you need to know how to compute corporate tax in UAE.
This complete guide will show you how to do all the math, including how to figure out your taxable income, tax deductions, applicable rates, and important things to keep in mind for both free-zone companies and international corporations.
What Is Corporate Tax, And Why Was It Made?
Corporate tax is a type of direct tax that businesses pay on their net profit. The UAE made it happen to make their taxes more consistent with international rules, to make things clearer, to bring in more money for the government than just oil, and to help long-term economic growth. Even with this change, the UAE still has one of the lowest company tax rates in the world, which makes it a great place to do business.
Step 1: Make your financial documents
To start, every business needs to make sure its financial records are correct for the tax year. The rules for making these claims should be followed by accountants.
This is what applies:
International Financial Reporting Standards (IFRS) must be followed by companies that make more than 50 million AED a year.
IFRS for SMEs or cash-basis accounting (in some cases) can be used by small and medium-sized businesses below this size barrier.
The net profit shown in these financial records is what will be used to figure out the company’s taxes.
But that number isn’t the final one used to figure out taxes—adjustments need to be made before taxable income is found.
Step 2: Change the profit in accounting to find the taxable income
The profit from accounting is not directly taxed. The company tax law spells out changes that must be made to ensure that only taxable business income is taken into account.
1. Add-backs
Tax rules may say that you can’t claim some of the costs that you write down in your books. Some of these are:
- Paying fines and fees
- Expenses not related to the business
- Costs that don’t have good proof
- Certain interest costs that are higher than what is allowed
- Unrealized losses (it depends on the case)
- These costs that aren’t allowed must be added back to the profit.
2. Take deductions
Some types of income or gains may not be taxed, such as:
- Dividends from UAE companies that qualify
- Income from the sale of qualified shares
- Income that is exempt from taxes in free zones
- Depreciation or interest costs that are allowed
- These are taken away from the profit.
3. Help for Tax Loss
As long as the business doesn’t go over certain limits, it can carry losses forward to lower its future tax income. This lowers the amount of income that is taxed and helps lower future tax bills.
Formula for Taxable Income
Taxable Income = Accounting Profit
+ Add-Backs (Non-Allowable Expenses)
– Deductions & Exempt Income
– Carried-Forward Tax Losses (if applicable)
Once the amount of taxable income has been found, the right tax rate must be applied to find out how much tax is due.
Step 3: Use the business tax rates
A tier-based tax structure is used in the UAE:
- Income Level That Is Taxable Tax Rate Up to AED 375,000 is 0%
- More than AED 375,000 is 9%
- Large companies that follow OECD global tax rules pay 15%
This means that the first part of your taxable income is not taxed, and only the rest of it is taxed at 9%.
Example: Figuring Out Business Tax
Let us say that a company has taxable income of AED 600,000 after all the changes have been made.
In short:
First AED 375,000 – no tax – AED 0
AED 225,000 less 9% tax equals AED 20,250.
Total tax due by the company is AED 20,250.
If the income that was taxed was less than AED 300,000, there would be no tax to pay.
Step 4: Think about free-zone rules
In the UAE, there are more than 40 free zones, each with its own tax breaks. In terms of business taxation:
- A person who qualifies for a free zone may still be eligible for 0% tax on qualifying income
- Non-qualifying income is taxed at the standard 9% rate.
However, businesses in free zones must strictly follow rules like:
- Keeping enough substance in the UAE
- Making money from things that qualify
- Not choosing to take advantage of benefits
- Doing business with foreign companies or within the borders of a free zone
If any of the qualifying conditions are not met, the full amount of tax may be due at normal rates.
Step 5: Know the rules for special adjustments and compliance
Figuring out corporate taxes can get trickier because of the unique needs of each business. Some of these are:
Deals with Related Parties
Transfer price rules make sure that related parties get fair market values for their goods and services.
Limits on Interest Deductions
Interest costs that go over certain amounts might not be deductible.
Depreciation and Capital Assets
The rules for depreciation in tax law may be different from those in accounting books.
Group Help
Forming a tax group may let you combine your finances and get tax breaks for activities within the group.
Gains or Losses Not Realized
Depending on the method of accounting used, some gains or losses may need to be handled in a special way.
For assessment and auditing reasons, businesses must also keep supporting financial records.
Step 6: Final Checklist for Figuring Out Corporate Tax
Here is a useful checklist for finding out the right corporate tax calculations:
- Make sure your financial records are correct
- Check the financial profit; find things to add back; find deductions and income that isn’t taxed;
- If loss relief is possible, use it.
- Figure out your taxable income
- Use the right tax rate
- Look over tax breaks (like free zones)
- Prepare to file your tax return
- Pay your taxes and keep your records up to date
Using this guide will help you file your taxes correctly and reduce the chance of getting fined.
Why It’s Important to Do the Right Business Tax Calculation
Making a mistake in your calculations can have very bad results. In simple terms:
Chance of Not Paying Enough Tax
- Risk of getting fined or sued for not paying enough taxes
- Less money coming in
- Not following the rules
- Having trouble with cash flow
- Brand damage
- Financial efficiency was lost
Overpaying Taxes Also Leads To Problems, Like:
- Decisions about future investments
- Making budgets and keeping track of cash flow
- Policies for distributing profits and paying dividends
- Finally, feel confident in your ability to handle corporate tax.
Conclusion
Due to the low rate and high threshold, the UAE’s company tax rules may seem simple. However, the actual calculation often involves a lot of complicated accounting and legal details. Businesses need to think about costs that can’t be deducted, tax breaks, free-zone incentives, and compliance systems for multinational structures.
By following the step-by-step instructions in this guide and staying up to date on how the law changes, businesses can make sure they are following the rules, avoid fines, and get the best tax results in a legal way. You can resort to professional advisors like Xpert Tax & Accounting for the right tax calculations and to avoid any hefty penalties and fines. Speak to our experts for flawless tax compliance.
FAQs
When Does A Business In The UAE Have To File And Pay Its Company Tax?
Most of the time, businesses only have to file and pay their tax once a year. A business has nine months from the end of its tax period to file its company tax return and make the payment.
Are There Any Fines For Filing Taxes Late Or Wrong?
Yes. The UAE has penalties for people who don’t register on time, file late, give wrong information, pay too little tax, or keep good financial records. The amount of the penalty depends on the type of violation and how bad it was.
Do Small Businesses Or New Businesses Get Extra Help?
Small businesses with less than a certain amount of revenue may be able to get Small Business Relief, which lets them be treated as having no taxable income for a certain amount of time, as long as they meet certain conditions and follow the rules.
