According to UAE Corporate Tax Law, accounting income must be calculated to determine taxable income. The financial statements will serve as the basis for the net profit or loss for the applicable tax period. To calculate the Taxable Income for corporate tax purposes the Accounting Income must be adjusted.
Important Procedures for Calculating Taxable Income.
1. First let’s talk about accounting income. This is the net profit or loss as shown in the cash-based accounting or financial statements.
2. Modifications to Accounting Income
According to Article 20(2) of the Corporate Tax Law, adjustments to the accounting income are made for the following:
- Article 20(2)(a): Exempt Expenses and Income.
- Income from participating interests profit distributions and dividends.
- Foreign Permanent Establishment income or expenses (if elected) are considered while calculating
- Article 20(2)(c): Reliefs consist of both business restructuring and group relief.
- An expense that is not deductible (Article 20(2)(d)). The expenditure was not solely for business purposes such as capital expenditure, disallowed net interest expenditure, and entertainment expenses.
- Transactions involving related parties. For transactions that are not at arm’s length adjustments may be necessary.
3. Reduction of Tax Losses (Article 20(2)(f)). Subject to restrictions a tax loss carried forward or transferred between entities may lower the taxable income.
Adjustments to Calculate Taxable Income under the UAE Corporate Tax Law
Adjust Item | Legal Reference | Amount (AED) |
Accounting Income of the Taxable Person | xxx | |
Unrealised gain or loss if the election is made | … | |
Exempt Income (and exempt losses): | 20(2)(a) | … |
– Dividends and other profit distributions | … | |
– Other income or losses from Participating Interests | 20(2)(b) | … |
– income/expenditure of Foreign Permanent Establishment if the election is made | … | |
Reliefs: | 20(2)(c) | … |
– Qualifying Group Relief | … | |
– Business Restructuring Relief | … | |
Non-deductible expenditure: | 20(2)(d) | … |
– Expenditure that is not incurred for business | … | |
– Expenditure of a capital nature | … | |
– Disallowed Net Interest Expenditure (to be carried forward) and specific non-deductible interest costs | … | |
– Disallowed entertainment expenditure | … | |
– Expenditure that is related to Exempt Income | … | |
– Other non-deductible expenditure | … | |
Adjustments for Related Party Transactions (not at arm’s length) | … | |
Incentives/special reliefs (none at present) | 20(2)(e) | … |
Adjustments specified in a Ministerial Decision | 20(2)(g) | … |
Taxable Income before Relief for Tax Loss | 20(2)(i) | xxx/(xxx) |
Tax Loss Relief Set-Off | 20(2)(f) | xxx/(xxx) |
Taxable Income Subject to Corporate Tax | xxx/(xxx) |
The following rates of corporate tax are applied after the Taxable Income has been adjusted
• The standard rate for corporate taxes.
- AED 3,75,000 or 0% of the taxable income portion.
- 9 percent of taxable income over AED 3,75,000.
• A Free Zone Person who qualifies.
- 0% of qualifying income.
- 9 percent of taxable income that is not a qualifying income.
Reductions in Corporate Tax Liability
The corporate tax payable is reduced by:
- The tax credit for withholding.
- Foreign tax credit (as permitted by applicable double taxation agreements or Article 47).
Until a Cabinet decision provides more information about the types of income that are subject to withholding tax withholding tax is not applicable in the United Arab Emirates where the current withholding tax rate is 0%.
An illustration of how to calculate corporate taxes.
Adjust Item | Amount (AED) |
Taxable Income Subject to Corporate Tax | |
0% on the income till AED 375,000 | – |
9% on the income that is over and above AED 375,000 | Xxx |
Corporate Tax Liability | xxx/(xxx) |
Withholding Tax Credit | – |
The Foreign Tax Credit shall be calculated under Article 47 of the Corporate Tax Law or as per the Double Taxation Agreement | (xxx) |
Corporate Tax Payable/Refundable | xxx/(xxx) |
Conclusion
According to the UAE Corporate Tax Law, taxable income is calculated by subtracting non-deductible expenses applying reliefs and adding exempt income to accounting income. After that, the corporate tax rates of 0 and 9 percent are applied to the taxable income with potential deductions for withholding tax credits or foreign tax credits.Bottom of Form