UAE Corporate Tax Taxable Income

The United Arab Emirates (UAE) implemented a corporate tax system in June 2023, marking a significant shift in the country's economic landscape. This new regime offers a competitive tax environment for businesses, with a focus on supporting small businesses and startups. Understanding the UAE corporate tax taxable income is crucial for businesses operating in the UAE to ensure proper tax compliance.

What is Taxable Income?

Taxable income, in the context of UAE's corporate tax, refers to the profit a business generates after accounting for allowable deductions. It forms the base upon which the corporate tax liability is calculated.

Taxable income is calculated by starting from accounting profit and adjusting for items such as exempt income, non-deductible expenses (e.g. fines), unrealised gains, and income from foreign branches, as per Article 20–28 of Federal Decree-Law No. 47 of 2022.

Corporate Tax rates on Taxable Income in UAE

Standard tax rate - Taxable income exceeding AED 375,000 (approximately USD 102,100) 9 %, For Free Zone Persons to qualify for 0%, they must meet substance requirements, derive qualifying income (e.g., transactions with foreign persons), and not conduct excluded activities. Non-qualifying income is taxed at 9%.

UAE plans to implement OECD’s Pillar Two rules for MNEs with revenue over AED 3.15 billion, but specific timelines and mechanisms are pending further regulations.

Let's break down each in detail:

• Threshold for Small Businesses: The UAE offers a generous incentive for small businesses. Any taxable income not exceeding AED 375,000 (approximately USD 102,100) is subject to a 0% tax rate. This significantly reduces the compliance burden for start-ups and small enterprises.
• Standard Tax Rate: For taxable income exceeding AED 375,000, a standard corporate tax rate of 9% applies. This rate is among the most competitive in the region, solidifying the UAE's position as an attractive business hub.
  Qualifying Free Zone Persons (QFZPs): Businesses operating within designated Free Zones in the UAE may enjoy additional benefits. The qualifying income of a QFZP is also subject to a 0% tax rate. However, their non-qualifying income, earned outside the Free Zone, is taxed at the standard 9% rate.
• Multinational Enterprises (MNEs): For MNEs falling under the OECD's Base Erosion and Profit Shifting (BEPS) 2.0 framework (with global revenues exceeding AED 3.15 billion), different tax rates may apply as per specific BEPS rules.

Interest expense deduction is limited to AED 12 million or 30% of tax-adjusted EBITDA. Excess interest is carried forward for 10 years.  

Components of Taxable Income

While evaluating corporate taxable income calculation in UAE, businesses should consider the following components:

• Revenue Streams: It refers to all of your income that is generated from main business activities.
• Allowable Deductions: It includes depreciation, operational expenses, and other expenses that reduce the taxable income.
• Exemptions and Allowances: It mainly refers to the specific exemptions stated under the UAE corporate tax law. This will vary for free zone businesses and mainland companies.
• Non-Taxable Income Adjustments: It means the exclusion of certain revenues that are exempt by law.

Understanding these components helps in optimizing the UAE business taxable income and ensuring proper compliance.

Calculating Taxable Income

The UAE's corporate tax system uses a financial accounting profit as the starting point for determining taxable income. However, several adjustments are made according to the UAE Corporate Tax Law. These adjustments can be broadly categorized as:

• Adding back non-deductible expenses: Certain expenses incurred by the business, such as personal expenses of shareholders or penalties for non-compliance, are not tax-deductible and need to be added back to the accounting profit.
• Adjusting for specific tax treatment: Some transactions may have different tax treatment compared to accounting standards. Depreciation methods or the treatment of intangible assets may be examples.

It's important to consult with a qualified tax advisor to ensure accurate calculation of taxable income and compliance with UAE tax regulations.

Challenges in Determining Corporate Tax Taxable Income in UAE

Complexities in Interpreting Allowable Deductions and Exemptions

It is hard to understand which expenses are deductible, especially with the changing tax laws and restrictions on certain expenses such as entertainment or non-essential business activities.

Challenges for Foreign Companies and Branches

Foreign companies may face difficulties in local tax rules, tax treaties, and compliance requirements, which may lead to confusion and potential misreporting of taxable income.

Managing Tax Compliance in Companies with Diversified Sources of Income

Businesses that generate income both locally and internationally face difficulty in tracking income, handling transfer pricing, converting currencies, and meeting tax requirements in other jurisdictions. It makes the determination of taxable income more complex.

Impact of Taxable Income on Corporate Tax Liability

Once the taxable income is determined, the applicable tax rate is applied to calculate the corporate tax liability. Here's a simplified example:

• A company earns a taxable income of AED 500,000.
• The first AED 375,000 is subject to a 0% tax rate.
• The remaining AED 125,000 (AED 500,000 - AED 375,000) is taxed at 9%.

Corporate tax liability = (Taxable income exceeding threshold) x Tax rate = AED 125,000 x 9% = AED 11,250)

Conclusion

Reyson Badger provides experience advice on Understanding Corporate tax taxable income in UAE is essential for businesses operating in the UAE's corporate tax regime. The UAE offers a competitive tax environment with a beneficial threshold for small businesses and QFZPs. Consulting with a tax professional is recommended to ensure accurate tax calculations and compliance with UAE regulations. By effectively managing taxable income, businesses can optimize their tax liabilities and contribute to the UAE's growing economy.