Corporate taxation is essential for every country’s economic growth as it helps nations achieve alternate sources of revenue. UAE, being primarily an oil-dominated economy, took the decision to levy corporate taxes to comply with international tax rules and take the nation a step further toward revenue diversification. The country has been making an effort in this regard by investing in technology and investments, introducing the value-added tax in 2018, and now, most recently, introducing the corporate tax. Such a tax will be implemented with the start of the new financial year in June 2023. Implementation of such a system of taxation will help the UAE government establish itself as a global hub for business. The scope of corporate tax extends to all business and commercial activities within the seven emirates. As promised by the government, the free zones do not come under the purview of such a system of taxation. There are various other further exemptions under the corporate tax structure that are a relief for businessmen and individuals alike. In this article, we discuss how corporate tax is calculated in UAE and what are the adjustments applicable.
Basic points to be remembered before calculating corporate tax:
- Corporate taxes will be levied on businesses and individuals.
- It will be imposed annually, and the corporate tax liability will be calculated by the tax-liable person on a self-assessment basis.
- The taxable person needs to make certain adjustments to their accounting income to determine their taxable income.
- All the amount should be expressed in UAE Dhiram
- The corporate tax to be calculated will be on the basis of taxable income ascertained for the relevant financial year.
- A taxable person is required to settle their tax dues within nine months from the end of the relevant tax period or by any other date as specified by the authority.
Corporate tax rate
The tax shall be imposed on the taxable income of the taxable person at the following rates:
- 0% (zero percent) corporate tax shall be levied on income not crossing the specified rate as mentioned in the cabinet, which is AED up to 3,75,000.
- A 9% (nine percent) corporate tax shall be levied on income that exceeds the amount specified by the cabinet. ie. AED 3,75,000.
As mentioned, there are certain kinds of income that are exempt from corporate tax; one will not be subject to tax on such income and cannot claim deductions for the same. The reason for such exemptions is to prevent double taxation. These exemptions include dividends earned from foreign permanent establishments, capital gains from participating interest of less than 5%, individual income, etc.
Further, the system also provides for certain deductions. All business expenses are deductible, subject to certain conditions.
The corporate tax will be calculated at such a rate after applying all the deductions and exemptions to the accounting income of a taxable person.
To illustrate the calculation of corporate tax with an example, if a company’s financial statements exceed AED 3,75,000 and stand at AED 5,80,000, corporate tax will be levied on the amount exceeding AED 3,75000, as AED 3,75000 will be subject to a 0% tax rate. This leads to a corporate tax of AED 18,450. (5,80,000-3,75,000 *9%).
This can be expressed in a tabular form as follows:
Final taxable income after deductions-
Final taxable income up to 3,75,000-
@0% tax rate = 0
Final taxable amount in excess of 3,75,000 (5,80.000-3,75,000=2,05,000)-
@9% tax rate = 18,450
Corporate tax liability-
The system also provides for tax loss provisions in the form of tax loss relief, which lets a taxable person offset their tax loss against subsequent tax periods to arrive at net taxable income. Further, in the form of a transfer of tax losses, which lets a taxable person transfer their tax losses to another taxable person given that certain conditions like that both persons are juridical persons, both persons are residents, none of the persons are exempt, etc are met.
The system also allows a resident person to form tax groups where the resident person is referred to as the "parent company" and the other resident persons are referred to as "subsidiaries.".
All the amounts in the financial statements must be quantified in the United Arab Emirates dirham. A taxable person is required to settle their tax dues within nine months from the end of the relevant tax period or by any other date as specified by the authority.
Adjustments on UAE Corporate Tax
The main adjustments that may be applicable while calculating UAE corporate tax are listed below
- Any kind of unrealized gain or loss that may be ascertained under clause 3 of article 20 of the CT law
- Any sort of exempt income of the taxable entity as highlighted in Chapter 7 of CT law
- Any reliefs that may be claimed by the taxable entity under Chapter 8 of CT law
- Any deductions that may be claimed under Chapter 9 of CT law
- Any transactions that may be with related persons or connected parties as described in Chapter 10 of CT law
- Any tax loss relief as described in Chapter 11 of CT law
- Any kind of special incentives or treatment given to qualifying business activity or entity as described in the cabinet’s decision made as per the minister's advice
- Any income that is not taken into account for calculating the CT law
- Any further adjustments may be notified by the Minister.
How can CDA assist you in corporate tax calculating and filing?
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