Taxable Income in UAE: A Guide for Business Owners.
A common question asked for 2023 is is there corporation tax in Dubai and Fujairah? The answer is Yes, businesses in Dubai, Abu Dhabi, Sharjah, Umm Al Qaiwain, Fujairah, Ajman and Ras Al Khaimah, will all potentially be subject to the newly introduced Corporation tax on Taxable profits at 9% unless specifically exempt.
What are the benefits of understanding Corporate tax in the UAE?
As the United Arab Emirates (UAE) continues to evolve and improve its tax system, it’s important for business owners to understand the taxable income calculation process. With a number of areas still uncertain, including the definition of Qualifying Income, it’s important to stay informed on the latest developments in the UAE’s corporate tax (CT) regime.
The starting point for determining taxable income in the UAE is the accounting net profit (or loss) as stated in a business’s financial statements. These financial statements must be prepared in accordance with accounting standards accepted in the UAE, typically International Financial Reporting Standards (IFRS).
Expenditure incurred solely for the purpose of the business and not of a capital nature can be deductible in the tax period in which it was incurred. However, the CT Law disallows certain expenses to prevent relief for expenses that don’t generate taxable income or to address possible abuse.
The CT Law includes key adjustments to the accounting net profit to compute the taxable income, including exempt income, tax reliefs, non-deductible expenditure, transfer pricing adjustments, tax loss reliefs, and any other income or expenditure specified in a future Cabinet Decision. Depreciation and deferred tax implications must also be considered when computing taxable income.
Steps how to calculate corporate tax in UAE
The process of computing taxable income in the UAE involves several steps, including:
- Determining the net accounting profit/(loss) before tax
- Making fair value accounting and capital asset adjustments (subject to election)
- Deducting/adding unrealized gains/losses and foreign exchange gains/losses
- Deducting exempt income, including dividends, profit distributions, foreign PE, and international transportation (for non-residents only)
- Considering tax reliefs, such as transfers within a qualifying group and business restructuring relief
- Adding non-deductible expenses, such as interest, entertainment expenses, penalties, and bribes
- Adjusting for transactions with related parties and connected persons
- Calculating tax loss relief (limited to 75% of taxable income)
- Computing taxable income
- Determining the tax liability, taking into account the taxable income, withholding tax credit, and foreign tax credit.
Small businesses may be eligible for relief under the CT Law, if their revenue for the relevant and previous tax periods do not exceed a certain threshold and meet certain conditions. If a business applies for small business relief, certain provisions of the CT Law, such as exempt income, reliefs, and deductions, will not apply.
In conclusion, it’s essential for business owners to understand the taxable income calculation process in the UAE, as the CT regime continues to evolve and improve. Staying informed on the latest developments and updates can help ensure that your business is fully compliant and taking advantage of any tax reliefs available.
What Tax Reliefs are there for UAE businesses?
The CT Law provides several tax reliefs aimed at reducing the tax burden on businesses. Some of these reliefs include:
- Transfers within a qualifying group – This relief allows businesses to transfer assets, liabilities or shares within a qualifying group without incurring tax implications.
- Business restructuring relief – This relief applies in case of a restructuring or reorganization of a business and is aimed at reducing the tax impact of such events.
- Withholding tax credit – This relief allows a business to claim a credit for withholding taxes paid on its income from foreign sources.
- Foreign tax credit – This relief allows a business to claim a credit for taxes paid to foreign tax authorities, which can be used to offset its CT liability.
- Tax loss relief – This relief limits the amount of taxable income that can be reduced by carried forward losses and intragroup transfer of losses to 75% of taxable income.
- Small Business Relief – A tax resident person may elect to be treated as not having derived any taxable income if its revenue for the relevant and previous tax periods do not exceed a certain threshold and meet certain conditions (to be confirmed by Cabinet Decision).
It is important to note that these tax reliefs are subject to terms and conditions set by the Cabinet Decision, which may change over time.
