In order to calculate corporate tax in UAE, one needs to know the following things: accounting profit; adjustments for taxes, exempt items, etc.; and the UAE Corporate Tax Rate. Knowing all the above will enable a business to calculate its tax payable with greater ease. This article is written to explain the process of calculating corporate tax in UAE through examples.

UAE Tax Rate

The corporate taxation regime in the UAE operates under a two-tiered system. To learn how to calculate corporate tax in UAE, one should know the relevant rates as follows:

• 0% for taxable income below AED 375,000
• 9% for taxable income exceeding AED 375,000

The Qualifying Free Zone Person is eligible for the 0% rate for the qualifying income provided that the necessary requirements are fulfilled. In all other cases, the 9% rate is used as the basis for calculate corporate tax in UAE.

Tax Formula

In order to calculate corporate tax in UAE, accounting net profit is taken into account and then tax adjustment needs to be made. The main procedure includes:

1. Accounting net profit is taken into consideration.
2. Non-deductible expenses are added such as certain fines and entertainment disallowances.
3. Exempt income is subtracted such as qualified dividends.
4. Allowable adjustment is applied such as transfer pricing adjustments and tax loss carry forward.
5. Taxable income is calculated.
6. 0 percent is charged on the first AED 375,000 and 9 percent is charged on the income above it.

This process explains how businesses calculate corporate tax in UAE rather than just applying 9 percent on accounting net profit. Business organizations need to calculate corporate tax in UAE through considering adjustments, exemptions, and relief conditions.

Tax Example

Let’s take a mid-sized business dealing with trades. This is the illustration on how to calculate corporate taxes in the UAE using actual financial data.

Assuming that the company’s accounting net profit is AED 900,000. In the review, the finance department finds out that there is AED 50,000 of non-deductible entertainment expenditures and AED 20,000 of non-taxable dividend income.

Taxable income = AED 900,000 + AED 50,000 – AED 20,00

To calculate corporate tax in UAE, we apply the two-step approach:

• Income above AED 375,000 taxed at 0% = AED 0
• Income above AED 375,000 but below AED 930,000 taxed at 9% = AED

This is a case where adjustments are critical. Any company that wants to compute the UAE corporate tax properly will need to factor in add-backs and exemptions. This example is also clear evidence as to why any company ought to calculate corporate tax in UAE using taxable income and not just multiplying 9% of its accounting income.

Small Business Relief

Many business owners often ask if there is any corporate tax that they need to pay at all. Small Business Relief becomes very important when calculating corporate tax in UAE.

If the UAE resident business qualifies for the small business relief scheme and its income is up to AED 3 million, then it can choose to be treated as having taxable income of nil, provided certain conditions are fulfilled. This implies that a qualifying business will be exempted from the taxable income formula of that particular period.

The threshold of AED 3 million income is therefore very important to calculate corporate tax in UAE.

This relief is not applicable to Qualifying Free Zone Persons or members of multinational groups having consolidated worldwide income exceeding AED 3.15 billion. Companies failing to qualify for relief will calculate corporate tax in UAE using the standard procedure.

Despite this provision of relief, it is still important to register, file and keep records properly. This is because while the relief eliminates the tax liability under certain conditions, it does not eliminate the compliance obligations.

Small Business Example

Imagine a freelance design studio that generates AED 2.4 million in sales and spends AED 2.1 million in expenses. This will make a profit of AED 300,000. The normal procedure will allow it to determine the amount of its taxable income and compute its corporate tax in UAE.

If it qualifies for the Small Business Relief program, it has an option to apply for the program and not compute its corporate tax in UAE using the normal method of calculating taxable income.

Let us look at the case of a service company with total revenue of AED 3.4 million and total expenses of AED 3.1 million, resulting in a profit of AED 300,000. The company is not eligible for the Small Business Relief program because its total revenue surpasses AED 3 million. Thus, the company has to calculate corporate tax in UAE.

As its taxable income still equals AED 300,000, the company will pay no UAE corporate tax according to the 0% rate. However, the company has to compute UAE corporate tax accurately.

Standard Calculation vs Relief

When a company needs to calculate corporate tax in UAE, taxable income must normally be determined unless an applicable relief or special regime changes the calculation.

FAQs

What is the UAE corporate tax rate currently?

The tax rate is still 0 percent for taxable income not exceeding AED 375,000, and 9 percent for the excess of this amount, except where Small Business Relief or the free zone system qualifies the business. It is vital when you calculate corporate tax in UAE.

How do I calculate corporate tax in UAE if there was a loss in my company?

If the adjusted taxable income is negative, then no corporate tax is payable in this period, but the loss can be carried forward under specific terms. Businesses are advised to check the guidelines prior to calculating corporate tax in UAE in subsequent periods.

Is it Revenue or Profit that makes the decision about Small Business Relief?

The Revenue is what is important here. It is worth noting that the limit of AED 3 million refers to revenue, and not profit. This factor becomes very important, considering that you need to calculate corporate tax in UAE.

Are the formulas for calculating taxes different for free zone companies?

Qualifying Free Zone Persons can benefit from the 0 percent rate for qualifying income, whereas non-qualifying income may be subject to the regular corporate tax calculation process.

Final Thoughts

Learning how to calculate corporate tax in UAE depends on knowing the amount of taxable income, applying the correct rate of the two-tier tax, and finding out if Small Business Relief is applicable. Whether you are a small consultant or a developing company, these basics will help you to make your calculation of corporate tax in UAE.

For professional help, the tax advisors at Ask CA can analyze your accounts to help you calculate corporate tax in UAE.