UAE Corporate Tax Calculation

The UAE introduced a federal corporate tax (CT) system in January 2022. This tax applies to businesses operating in the UAE mainland, excluding certain free zones. Free zone persons are within the corporate tax regime; however, if they satisfy the conditions of a Qualifying Free Zone Person, their qualifying income may be taxed at 0%. The CT regime implements a tiered system with rates varying depending on the taxable income. This guide serves as a detailed manual to help you prepare your company for the UAE Corporate Tax Calculation.

Key Points on UAE Corporate Tax

Tax Rate:

• A standard rate of 9% applies to taxable income exceeding AED 375,000.
• A 0% tax rate applies to taxable income up to AED 375,000.
• A separate tax rate (to be determined) will apply to large multinationals meeting specific criteria.

Taxable Income:

• The basis for calculating CT is the net profit (or loss) Start with accounting profit. Then apply adjustments as required by the CT law: exclude exempt income, add back non-deductible expenditure, apply loss relief rules, interest deduction limits, etc., as reflected in a company's financial statements prepared following International Financial Reporting Standards (IFRS) or similar standards accepted by UAE authorities.
• Adjustments are made to the net profit to arrive at the taxable income, considering applicable deductions and excluding exempt income.

Calculating Corporate Tax in the UAE

Here's a step-by-step approach to UAE corporate tax calculation:

Gather Financial Statements:

You'll need your company's financial statements prepared according to IFRS or a similar accepted standard.

Identify Net Profit:

• Locate the net profit figure in your financial statements. This represents your company's profit after accounting for all expenses and revenues during the tax period.

Adjustments for Taxable Income:

• Review the financial statements to identify and add back any non-deductible expenses that may have been subtracted when calculating net profit.
• Conversely, identify and remove any income exempted from corporate tax.
• Common examples of deductible expenses include business-related costs, interest on business loans, and depreciation on assets.
• Interest Limitation Rule: Interest expense deduction is capped, affecting allowable deductions.
• Tax Loss Relief: Tax losses can be carried forward and offset future taxable income, subject to conditions.

Apply Tax Rate:

Once you have reached the final taxable income figure, apply the relevant tax rate based on the UAE's tiered system:

• 0% tax for taxable income up to AED 375,000.
• 9% tax for taxable income exceeding AED 375,000.

Example Calculation

Let's assume your company's net profit for the tax period is AED 500,000. Here's how to calculate the corporate tax in UAE payable:

Taxable Income Calculation:

• Since the net profit (AED 500,000) exceeds the AED 375,000 threshold, adjustments for taxable income are likely not required in this scenario (assuming all expenses are business-related and deductible).
• Therefore, the taxable income for corporate tax purposes is AED 500,000.

Corporate Tax Calculation:

• As the taxable income (AED 500,000) surpasses AED 375,000, the applicable tax rate is 9%.
• Corporate Tax Payable = Taxable Income * Tax Rate
• Corporate Tax Payable = AED 500,000 * 9%
• Corporate Tax Payable = AED 45,000

Important Considerations

• The UAE CT regime is relatively new, and further guidance or updates from the Ministry of Finance can be expected. Staying informed about any official announcements is crucial.
• Consulting a tax professional is advisable, especially for complex situations or companies with significant taxable income. They can assist with navigating the CT regime, ensuring proper calculations, and maximizing deductions and allowances.

By following these steps and considering the essential points, you can calculate your company's corporate tax liability in the UAE. Remember, this guide serves as a general overview, and seeking professional advice is recommended for comprehensive tax planning and compliance.