How to Calculate UAE Corporate Tax and Business Profit

The UAE Ministry of Finance (MoF) stated on January 31, 2022 that the Federal Corporate Tax on company profits/income will be implemented for fiscal years beginning on or after June 1, 2023. The UAE Corporate Tax regime was created to combine best practices throughout the world while also reducing the cost of compliance for firms.

Corporate tax will be imposed on the net earnings of UAE businesses as recorded in their financial reports, which will be prepared in compliance with global accounting rules, subject to any changes necessary by Corporate Tax Regulations.

The UAE has publicly declared the new system’s major design principles and policies, even though the Corporate Tax Law has not yet been approved.

In the following article, we have summarized the essential points:

Effective Date

The UAE Corporate Tax regime will be implemented for fiscal years commencing on or after June 1, 2023.

• A business having a financial year that begins on July 1, 2023, and ends on June 30, 2024, will be subject to Corporate Tax beginning July 1, 2023
• A company with a financial year that begins on January 1, 2023 and ends on December 31, 2023 will be subject to the UAE Corporate Tax beginning on January 1, 2024.

Application of the Corporate Tax

The UAE Corporate Tax will be levied at the federal level. It will apply to all enterprises and commercial operations (both people and legal entities) operating in the UAE under a commercial or freelancer license. There are certain exemptions, such as firms engaged in natural resource extraction, which will remain to be subjected to UAE corporate taxation.

Read More : What is Corporate Tax and How does it Affect Company Owners in the GCC?.

How Do You Determine the Business Profit/income Subject to UAE Corporate Tax?

• Except for commercial activities such as the extraction of natural resources, which will be taxed in accordance with emirate-specific levies. All business and commercial activities in the UAE will be subject to the UAE corporation tax.
• The company tax will be paid on taxable income, which is defined by the UAE corporate tax legislation as a business’s accounting net profit after specific adjustments (deductibles). The corporation tax will be levied on ‘taxable income,’ defined as a business’s accounting net profit after certain adjustments (deductibles), as defined by the UAE corporate tax law. Accounting net profit is the amount stated in financial statements produced according to International Accounting Standards

• The UAE corporate tax policy applies to commercial operations, which include all forms of commercial activity conducted in the UAE under a trade license or authorization, as well as an income obtained under freelancer licenses (where taxable income exceeds AED 375,000).

Corporate Tax Rate

The UAE Corporate Tax will be applied to taxable income, which is defined by the UAE Corporate Tax law as a company’s accounting net profits after specific adjustments. Accounting net profit refers to the amount stated in financial statements produced according to International Accounting Standards.

The following will be the progressive tax rate:

• 0% for taxable income up to AED 375,000;
• 9% for taxable income beyond AED 375,000; and
• A separate tax rate for significant multinationals that fulfill specified conditions laid forth in the OECD’s Base Erosion and Profit Shifting project’s ‘Pillar Two.’

Foreign Corporate Tax levied on taxable revenue in the UAE will be credited against the UAE Corporate Tax obligation. Entities subject to the UAE Corporate Tax will be entitled to carry forward excess losses and use losses earned before the Corporate Tax took effect.

Individuals From Abroad

The UAE Corporate Tax will only apply to multinational companies and individuals that do trade or business in the UAE regularly or on a continuous basis. In the vast majority of circumstances, dividends, capital gains, interest, royalties, and other investment returns will be exempt from UAE corporation tax.

Free Zone in the United Arab Emirates

Free zones will be subject to the UAE corporate tax laws.  On the other side, the UAE Corporate Tax regime would maintain existing tax incentives for free zone businesses that fulfill all regulatory requirements and do not operate a business on the mainland of the UAE.

Compliance with the Taxation System

• All businesses, including free zones, will be required to register and file a Corporate Tax return.
• The registration process’s specifics have yet to be revealed.
• According to the FTA, the CT return must be filed online each financial year.
• There are no requirements for advanced or provisional Corporate Tax files or payments.
• Penalties will be imposed if the Corporate Tax regime is not followed.

Personal Income Tax

Individuals will be exempt from corporate and personal taxes on salaries, real estate, other investments, and any other sources of income. Furthermore, dividends, capital gains, and the income derived through personal ownership of shares or other securities will be tax-free. Individuals will also be exempt from paying taxes on interest and other income obtained through bank accounts or savings plans.

Conclusion

With the introduction of the UAE Corporate Tax framework by the MOF, it is evident that the corporate tax system would be based on a statutory rate of 9% and 0%. The fundamental design characteristics have been confirmed. However, there are still several unknowns. The goal is to make the rule basic and straightforward so that UAE businesses can comply with it as little as possible. The MOF will provide comprehensive legislation, regulations, guidance, and compliance mechanisms.

If you require any advice or information on the possible impact of Corporate Tax in UAE on your organization or activities in the UAE, please do not hesitate to contact us.

Read More : Introduction of Federal Corporate Tax in UAE on Business Profits by the Ministry Of Finance on or After 1 June 2023.