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:
- Resource extraction companies follow emirate-specific tax regulations.
- Individuals with non-business income won’t be taxed, except for licensed business activities.
- 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).
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, who 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 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 Offset in the UAE Corporate Tax Context
In the UAE corporate tax landscape, businesses can set off tax losses against their taxable income for subsequent tax periods. However, there are some specific rules to bear in mind.
Utilization Limits: When calculating the taxable income for a particular period, businesses can offset their tax losses. However, this offset cannot exceed 75% of the taxable income for that particular period. If there’s still a portion of tax losses left, don’t worry – you can carry them forward indefinitely to offset against future taxable income.
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:
- Losses incurred before the effective date of Corporate Tax.
- Losses incurred before a person becomes a taxpayer for Corporate Tax purposes.
- Losses from activities or assets that generate income exempt from Corporate Tax.
- Losses incurred by a Free Zone Person that is not attributable to a Permanent Establishment (PE) in the mainland.
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 they want 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.
In the UAE, resident companies are liable for Corporate Tax (CT) on their global income, including capital gains. However, to prevent double taxation, certain types of income are exempt from CT under the following categories:
- If a UAE corporate shareholder owns a participating interest of at least 5% in a foreign entity, they won’t be subject to UAE corporate tax on dividends and other profits received from that entity.
- Various income types, such as foreign exchange gains, impairment, and capital gains and losses, received from either residents or non-residents will be exempt from UAE corporate tax if the participating interest criteria are met.
For a participation to qualify, the following conditions must be met:
(i) The ownership interest should be at least 5%;
(ii) The shareholder must hold the interest for a continuous 12 months (or intend to do so);
(iii) The participation must be subject to a tax rate in its home country of residence that’s no lower than 9%;
(iv) No more than 50% of the participation’s assets can consist of interests that wouldn’t qualify for a CT exemption if held directly by the taxable person;
(v) Any conditions specified by the Minister must be satisfied.
A participation is considered to meet the subject-to-tax requirement if:
- Its primary objective and activity involve acquiring and holding qualifying shares or interests;
- Most of the income during the relevant tax period comes from participating interests.
However, the participation exemption is not applicable for 2 years if the participation interest was acquired in a way that didn’t meet the participation interest conditions or was part of a group or restructuring relief.
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.
Bonus: Small Business Relief For UAE Corporate Tax
Small Business Relief is a UAE corporate tax benefit available to individuals or businesses residing in the UAE, provided their revenue in the current tax period and previous ones fall below 3 million AED for each tax period.
However, Small Business Relief cannot be claimed by:
- Individuals or businesses operating in qualifying free zones.
- Companies that are part of multinational enterprise (MNE) groups with combined group revenues exceeding 3.15 billion AED.
If you’re eligible for Small Business Relief, you can carry forward UAE corporate tax losses and excess net interest expenditure to future tax periods where you do not choose to apply for this relief.
It’s important to note that anti-abuse provisions will be enforced if there’s an artificial separation of businesses to exploit the Small Business Relief, so be cautious about that.
Conclusion: An Accounting Software Makes This Easier
Tax management or accounting software is crucial, especially for businesses in the UAE.
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!