How To Calculate UAE Corporate Tax?

Previously, in our UAE corporate tax guide, we’ve talked about what corporate tax in the UAE is and how it works. In today’s UAE corporate tax guide, we’ll learn how you can calculate it as a business owner.

If you’re a business owner in the UAE, it’s crucial to know how to calculate your UAE corporate tax to ensure you’re on the right side of the law and your finances are in order.

So, in today’s detailed guide, we’ll take you on a step-by-step journey through the UAE corporate tax calculation process, demystifying the complexities and making it a breeze for you to manage your tax obligations.

Let’s get started!

 

A Brief On What UAE Corporate Tax Is

 

Starting June 1, 2023, the UAE will introduce a 9% corporate tax for businesses with fiscal years beginning on or after that date, aligning with international tax standards to boost its global appeal. This new development requires businesses to quickly grasp the implications of UAE corporate tax.

 

Scope of UAE Corporate Tax

The UAE’s new national tax system applies to all businesses and commercial activities, with exceptions:

1. Resource extraction companies follow emirate-specific tax regulations.
2. Individuals with non-business income won’t be taxed, except for licensed business activities.
3. Businesses in Free Trade Zones can avoid this tax if they meet the specified criteria.

Foreign banks will transition to the UAE’s national tax law, necessitating adaptation to the new UAE corporate tax regulations.

 

UAE Corporate Tax Calculation

 

How Taxable Income Is Determined

In the CT regime, we start by using a business’s accounting net profit (or loss) as reported in its financial statements as the initial figure for calculating taxable income. We then make necessary adjustments to arrive at the final taxable income.

• For corporate tax in the UAE, the calculation is as follows:
• Corporate tax is assessed on a business’s annual taxable income.
• If the taxable income is AED 375,000 or less, the corporate tax rate is 0%.
• For taxable income exceeding AED 375,000, the UAE corporate tax rate is 9%.

It’s important to note that any foreign taxes paid can be subtracted from the profit reported in the financial statements.

Additionally, in the UAE, financial statements are typically prepared following the International Financial Reporting Standard (IFRS).

 

 

Who Must Calculate and Pay Corporate Tax in the UAE?

Based on my interactions with UAE business owners, there’s often confusion about who exactly is subject to this tax.

The corporate tax applies to:

 

 

• All UAE businesses and commercial activities 
• Foreign entities managed and controlled from the UAE 
• Freelancers and sole proprietors with business income exceeding AED 1 million (provided it’s from licensed/permitted activities) 

Notably, businesses involved in natural resource extraction remain taxed at the emirate level rather than the federal level. 

Step-by-Step Corporate Tax Calculation Process 

After helping dozens of UAE businesses set up their tax calculations in ProfitBooks, I’ve developed a straightforward approach that works consistently:

 

1. Start with Your Net Profit

The foundation of your corporate tax calculation is the net profit figure from your audited financial statements, which should be prepared according to IFRS or other approved accounting standards. 

This is exactly why I’ve always emphasized to my clients the importance of maintaining accurate financial records. With ProfitBooks’ easy-to-use accounting software, generating precise financial statements becomes effortless, eliminating the stress when tax season arrives.

 

2. Make Necessary Adjustments

This is where things get interesting. You’ll need to adjust your net profit by: 

• Adding back non-deductible expenses, such as: 
• 50% of entertainment expenses 
• Interest expense exceeding 30% of EBITDA 
• Fines and penalties 
• Dividends distributed 
• Personal expenses unrelated to business 
• Subtracting exempt income, including: 
• Qualifying dividends and capital gains from shareholdings (5 %+ ownership) 
• Certain income from permanent establishments abroad

 

 

I once worked with a restaurant owner who was incorrectly classifying all client meals as fully deductible. I had to explain that only 50% of entertainment expenses are deductible in the UAE, potentially saving him from a costly audit surprise.

 

3. Calculate Taxable Income

The formula is straightforward: 

Taxable Income = Net Profit + Non-deductible Expenses – Exempt Income
  

4. Apply the Tax Rate

Here’s where the threshold comes into play: 

• If your taxable income is ≤ AED 375,000: 0% tax (you pay nothing) 
• If your taxable income > AED 375,000: 9% tax on the amount exceeding AED 375,000 

Let me show you a quick example I often use with clients:

 

Example: 

• Net profit: AED 500,000 
• Taxable income after adjustments: AED 500,000 
• Taxable portion above AED 375,000: AED 125,000 
• Corporate tax payable: 9% × AED 125,000 = AED 11,250 

This clear threshold is a significant advantage for small businesses and startups in the UAE, allowing them to grow without an immediate tax burden. 

 

Deductible & Non-Deductible Expenses

Entertainment Expenses – 50% Allowable

When it comes to expenses related to entertaining clients, shareholders, suppliers, and other business associates, like covering the costs of meals, accommodations, transportation, admission fees, and the use of facilities or equipment for entertainment, you’re allowed to deduct up to 50% of the total amount spent. This includes any other expenses specified by a decision from the Cabinet.

 

Interest Expenses – 30% of EBITDA Allowed

You can deduct net interest expenses (referred to as NIE) up to 30% of your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

If, under the interest capping rules, there are interest expenses that you couldn’t deduct, you have the option to carry them forward and apply them as deductions in the ten subsequent tax periods.

In addition to the general interest limitation rule mentioned above, there will be no allowance for interest deductions if the loan was obtained, either directly or indirectly, from a related party for the following transactions with those related parties:

• Dividends or profit distribution.
• Redemption, repurchase, reduction, or return of share capital.
• Capital contributions.
• Acquiring ownership interest in a legal entity that is or becomes a related party after the acquisition.

 

100% Non-Deductible Expenses

• Income that is exempt from taxation.
• Expenses of a capital nature. (Expenses that don’t fall under a capital nature and are incurred solely and exclusively for your business’s purposes are generally eligible for tax deductions.)
• Fines and penalties, excluding compensation for damages due to a breach of contract.
• Dividends or profits are distributed.
• Illicit payments, including bribes.
• Donations made (except when they are directed to a Qualified Public Benefit Entity).
• Recoverable input VAT.
• Non-business expenses, such as personal expenses.
• Any other expenses that may be specified by the Cabinet Minister.
• Taxes imposed outside the UAE.

 

In summary, this information outlines the deductibility and non-deductibility of various types of business expenditures, including entertainment and interest expenses, while highlighting specific categories of non-deductible expenses. Businesses must be aware of these rules and guidelines when managing their financial affairs.

 

Tax Losses and Carry-Forward Provisions

If your business experiences losses, there’s some good news. According to Flyingcolour Tax, tax losses can be carried forward indefinitely and offset against up to 75% of taxable income in future periods. 

However, there are important restrictions to be aware of: 

• Losses before the tax regime (pre-June 2023) or before becoming a taxable person cannot be carried forward 
• Losses from exempt activities or assets are not eligible for relief 
• Ownership changes (>50%) and significant business model changes may forfeit loss carry-forward unless business continuity is maintained.

 

 

This unlimited carry-forward period is quite generous compared to many other jurisdictions I’ve studied, where losses often expire after a set number of years.

 

Special Rules for Free Zones

For businesses operating in Free Zones, special rules apply. Qualifying Free Zone Persons (QFZPs) can enjoy a 0% rate on qualifying income, while non-qualifying income is taxed at the standard 9% rate. 

From my conversations with Free Zone business owners, I’ve noticed there’s often confusion about what constitutes “qualifying income.”

Generally, this includes transactions with other Free Zone entities or with businesses outside the UAE, while mainland UAE transactions typically don’t qualify for the 0% rate. 

 

Group Entities: The UAE Corporate Tax Law allows for the transfer of tax losses between entities within the same group, under certain conditions:

• There should be 75% or more common ownership.
• Other conditions include having the same financial year and using the same accounting standards, while not being classified as an exempt person or a qualifying free zone person.

 

Conditions for Carrying Forward Tax Losses: To carry forward and use tax losses, a Taxable Person must meet these conditions:

 

• The same shareholder(s) must hold at least 50% of the share capital from the beginning of the period in which a loss is incurred until the end of the period in which the loss is offset against taxable income.
• If there’s a change in ownership of more than 50%, you can still carry forward tax losses as long as the new owners are engaged in the same or similar business.

 

 

Exceptions:

Keep in mind that tax loss relief is not available for the following losses:

1. Losses incurred before the effective date of Corporate Tax.
2. Losses incurred before a person becomes a taxpayer for Corporate Tax purposes.
3. Losses from activities or assets that generate income exempt from Corporate Tax.
4. Losses incurred by a Free Zone Person that are not attributable to a Permanent Establishment (PE) in the mainland.

 

Filing and Compliance Requirements

Based on my experience guiding businesses through compliance processes, here’s what you need to know about UAE corporate tax filing: 

• Annual Return: Only one corporate tax return is required per year 
• Filing Deadline: Returns must be submitted within 9 months after the end of the financial year 
• No Advance Payments: Unlike some countries, the UAE doesn’t require advance tax payments 
• Administration: The Federal Tax Authority (FTA) oversees registration, collection, and enforcement 

Failure to comply with these requirements can result in penalties, including:

• Late registration: AED 10,000 
• Late filing: AED 500/month for the first 12 months, then AED 1,000/month 
• Late payment: 14% per annum on unpaid tax, calculated monthly

 

 

I’ve seen businesses scramble at the last minute to compile their tax returns, which often leads to errors. That’s why I always recommend using cloud-based accounting software like ProfitBooks that maintains real-time financial records, making tax calculation and filing much more manageable. 

 

Unrealized Gains or Losses

Unrealized gains or losses happen when the value of an asset or liability that a business holds changes, but no actual buying or selling transaction has occurred.

For instance, if a business owns a property that increases in value, but the property hasn’t been sold, the profit is considered unrealized. These gains or losses can be documented for accounting purposes, even though they haven’t been realized as actual cash or losses yet.

Now, let’s talk about how this relates to the CT Law (Corporate Tax Law). A business subject to CT Law can choose how it wants to handle these unrealized gains and losses for tax purposes:

 

(a) Realization Basis for All: The first option is to recognize gains and losses only when they become real, meaning you wouldn’t pay taxes on unrealized gains, and you couldn’t deduct unrealized losses until you make a transaction.

 

(b) Realization Basis for Capital Assets: The second option is to use the realization basis, but only for assets and liabilities that are considered capital assets. This means that you’d defer taxation on unrealized gains and losses related to capital assets until they are realized.

 

It’s important to note that unrealized gains and losses from assets and liabilities classified as revenue accounts will still be included in your taxable income on a current basis. In other words, if these gains or losses are part of your day-to-day operations, they’ll be taxed as they happen.

 

Foreign Permanent Establishment Exemption

A resident entity might establish a permanent establishment (PE) in another country according to that country’s tax laws, and the income attributed to this foreign PE will be taxed in that country.

The UAE CT Law offers a choice to the resident entity to exempt this income in the UAE under the following options:

 

(a) Opt for an exemption of foreign branch profits.
To qualify for this exemption, the Foreign PE must be subject to UAE corporate tax or similar taxes at a rate not lower than 9% in the foreign jurisdiction. If this option is selected, the resident entity cannot consider losses, income, expenses, or foreign tax credits related to the Foreign PE in the UAE.

(b) Claim a foreign tax credit for taxes paid in the foreign branch country.
The maximum Foreign Tax Credit available is the lower of the foreign tax paid or the UAE corporate tax payable on the foreign-sourced income.

 

International Transportation Exemption
Income generated from leasing or operating aircraft or ships is not subject to UAE corporate tax as long as the following conditions are met:

• The income is earned by a non-resident.
• The leased aircraft, ship, or associated equipment is used for international transportation and there is a reciprocal arrangement with the foreign jurisdiction.

 

Group UAE Corporate Tax Benefits

Intra-Group Asset and Liability Transfers

In the realm of corporate taxation, the UAE Corporate Tax Law extends certain fiscal privileges for the exchange of assets or obligations between affiliated entities within what we call a “Qualifying Group.”

Now, let’s define a Qualifying Group: This category encompasses legal entities residing in the UAE or non-resident entities with a permanent presence in the UAE.

To qualify, either one entity must own 75% or more of the other, or a third party should possess a 75% or higher stake in both entities.

 

 

Notably, neither entity can be an Exempt Person or a Qualifying Free Zone Person, and both entities must follow the same accounting standards and share the same fiscal year.

The core benefit here is that when assets or liabilities are transferred between two Taxable Persons within the same Qualifying Group, there will be no tax implications in terms of gains or losses.

However, it’s essential to be aware of a two-year clawback period if there’s a subsequent transfer outside the permitted group or if either the transferor or transferee ceases to be a member of the permitted group.

 

Business Restructuring Tax Relief

The UAE Corporate Tax Law also offers tax relief for situations involving business reorganization, such as mergers, spin-offs, or other corporate restructuring activities where a portion or the entirety of a business is transferred in exchange for shares or other ownership interests.

This benefit comes into play when certain criteria are met:

• The transfer must comply with UAE regulations.
• All involved Taxable Persons must be either Resident Persons or Non-Resident Persons with a Permanent Establishment in the UAE.
• None of the Persons can qualify as an Exempt Person or a Qualifying Free Zone Person.
• The entities must share the same fiscal year and adhere to identical accounting standards.
• The transfer must be justified by valid commercial or economic reasons.

 

 

In the case of transferring shares or ownership interests of UAE corporate tax between two Taxable Persons during a business restructuring, there will be no taxable gains or losses stemming from this exchange.

But, similar to intra-group transfers, a two-year clawback period is relevant.

If there’s a subsequent transfer to a third party or if the shares or ownership interests received are transferred or disposed of, any gains or losses from the initial transfer will be accounted for in the period when the subsequent transfer occurs to the third party.

 

Practical Examples of UAE Corporate Tax Calculation

Let me share a few practical examples that might help illustrate how the calculation works in different scenarios: 

Example 1: Small Business Below Threshold 

• Annual revenue: AED 1,200,000 
• Net profit: AED 320,000 
• Non-deductible expenses: AED 30,000
• Exempt income: AED 0 
• Taxable income: AED 350,000
• Tax payable: AED 0 (below AED 375,000 threshold) 

Example 2: Mid-sized Business Above Threshold 

• Annual revenue: AED 5,000,000 
• Net profit: AED 600,000 
• Non-deductible expenses: AED 50,000 
• Exempt income: AED 100,000 
• Taxable income: AED 550,000 
• Taxable amount (above threshold): AED 175,000 
• Tax payable: 9% × AED 175,000 = AED 15,750 

Example 3: Business with Previous Losses 

• Current year taxable income: AED 500,000 
• Previous year losses carried forward: AED 200,000 
• Maximum offset allowed: 75% × AED 500,000 = AED 375,000 
• Applied losses: AED 200,000 (less than maximum) 
• Remaining taxable income: AED 300,000 
• Tax payable: AED 0 (below threshold after loss offset) 

Expert Tips for Minimizing UAE Corporate Tax 

After advising numerous UAE businesses on tax matters, here are some legitimate strategies I recommend:

1. Maintain Impeccable Records: Accurate documentation ensures you claim all eligible deductions and can defend your position during audits. 
2. Plan Major Purchases Strategically: Timing capital expenditures can help manage your taxable income across tax periods. 
3. Review Financing Structures: Ensure your interest expenses don’t exceed the 30% EBITDA cap, or consider alternative financing methods.

   
   

4. Separate Personal and Business Expenses: Personal expenses aren’t deductible, so maintain clear boundaries between personal and business spending. 
5. Consider Group Restructuring: If you have multiple entities, explore whether a tax group structure might be beneficial. 

These strategies have helped my clients save significant amounts while staying fully compliant with UAE tax law.

 

Common Mistakes to Avoid in UAE Corporate Tax Calculation 

Through my years working with UAE businesses, I’ve observed several common mistakes: 

1. Misclassifying Entertainment Expenses: Remember, only 50% of client entertainment is deductible. 
2. Ignoring Transfer Pricing Rules: Related-party transactions must comply with arm’s length principles. 
3. Overlooking Documentation Requirements: Proper documentation is essential for claiming deductions. 
4. Failing to Track Exempt Income Separately: Mixing exempt and taxable income sources complicates calculations. 
5. Not Planning for Group Relief: Missing opportunities to utilize group loss relief or restructuring benefits. 

Avoiding these pitfalls will save you headaches and potentially significant penalties down the road. 

How ProfitBooks Helps with UAE Corporate Tax 

Having worked with thousands of businesses through ProfitBooks, I’ve optimized our software specifically for UAE tax compliance. Our system: 

• Automatically categorizes expenses as deductible or non-deductible 
• Calculates your taxable income with built-in adjustment features 
• Generates tax-ready financial statements in compliance with IFRS 
• Provides real-time visibility into your tax position throughout the year 
• Offers specialized tax reports for the UAE corporate tax

 

 

Unlike other accounting software that charges extra for tax features, ProfitBooks includes all tax compliance tools in our standard packages. Our users consistently give us 4.7 out of 5 stars on review platforms for our user-friendly interface and comprehensive tax support.

 

FAQs About UAE Corporate Tax Calculation

Over the years, I’ve been asked countless questions about UAE corporate tax. Here are the most common ones: 

What is the corporate tax rate in the UAE? 

The standard rate is 9% on taxable income above AED 375,000. Income up to AED 375,000 is taxed at 0%. Large multinationals may face a 15% rate under global minimum tax rules. 

Who is subject to corporate tax in the UAE? 

All businesses and commercial activities in the UAE, including foreign companies managed and controlled from the UAE, except those involved in natural resource extraction or qualifying for exemptions. 

How do I calculate my taxable income for corporate tax? 

Start with net profit as per audited financial statements, adjust for exempt income and non-deductible expenses, then apply the tax rate to the amount exceeding AED 375,000. 

Are free zone companies subject to corporate tax? 

Yes, but Qualifying Free Zone Persons benefit from a 0% rate on qualifying income. Non-qualifying income is taxed at 9%. 

Are individuals subject to corporate tax? 

Only if they earn business income (e.g., from freelancing or sole proprietorships) exceeding AED 1 million, and it is licensed or permitted under UAE law. 

What expenses are deductible for corporate tax purposes? 

Ordinary business expenses such as salaries, rent, and marketing are deductible. Certain expenses (e.g., penalties, some entertainment costs) are not. 

How do I file and pay corporate tax in the UAE? 

File an annual corporate tax return with the FTA within 9 months of the financial year-end. Payment is made with the return; no advance payments are required. 

Can I offset losses against future profits? 

Yes, losses can be carried forward indefinitely but can only offset up to 75% of taxable income in any given period, subject to continuity of ownership and business activity requirements.

 

Conclusion: An Accounting Software Makes This Easier

Tax management or accounting software is crucial, especially for businesses for the UAE corporate tax.

This software is essential because it uses your declared net profit from financial statements to calculate corporate taxes. It’s the key to generating accurate financial and business reports.

Having precise financial statements is vital to paying the correct corporate tax.

Errors in your business data or financial statements can result in overpaying taxes, hurting your business, or facing fines.

The best part?

You save time, effort, and money while staying compliant.

 

ProfitBooks accounting software does exactly this, on the cloud, so your business can travel with you. Manage your UAE corporate tax or UAE VAT, using our easy-to-use software that enables you to be compliant.

The best part is that it is 100% free to use. So, get your FREE account now!

 

 

Also Read:

UAE Corporate Tax: What It Is & How It Works

VAT In the UAE: A Comprehensive Guide

UAE VAT Return Filing – Comprehensive Guide

Top 5 Accounting Software In the UAE (Pros & Cons)

The 11 Types Of Company Formations In The UAE | Dubai