Compute Tax Returns under Corporate Tax UAE

On November 11, 2024, the Federal Tax Authority in the UAE released “Tax Returns: Corporate Tax Guide | CTGTXR1” containing the instructions for UAE corporate tax returns guidance. The UAE CT return contains such as disclosure related to Transfer Price, elections made during the tax period, and transitional adjustments. A taxpayer must file financial statements that could be either audited or unaudited, formally break down a company’s revenues, expenditures, and assets to sphere requirements of IFRS, study overseas and provide information regarding permanent establishments (PEs) with connected revenue or losses. Tax elections, which may be irrevocable, have to be made within the first tax period with particular reference to: schedule of group transfer; business restructuring; limitations for deducting interest; and unrealised gains or losses. Documentation, for instance, tax residency documents and proof of credit from foreign taxes. The CT return also requires data validation on EmaraTax to ensure compliance with reporting schedule and other regulatory measurements.

Computation of UAE Corporate Tax

The Federal Decree-Law No. 47 in 2022 (corporate tax) declared effective from 1 June 2023 in the UAE. The rate is fixed @ 9 % on taxable income exceeding AED 375,000, and @ 0 %  at the income below this threshold.To cover all CT return activities, form structures and definitions, quantitative determinations, and timeframes and directions includes specific instructions for taxpayers. It concerns how different interrelate sections of the CT return can ease the procedure of filing the return.Aims of the blog include, but are not restricted to, determining who is obliged to submit tax returns, the mechanism of submission of returns as stipulated in the UAE corporate tax law, the functions of corporate tax consultants, and measures to avoid penalties.

1. Determining Taxable Income

Taxable income is established through adjusting accounting profits of a business accounting. It goes through the process of establishing the total revenues, less any permissible expenses, and applying the relevant exemptions as appropriate.

2. Applying the Tax Rate

• Income below AED 375,000: Exempted from taxation.
• @ 9% tax is imposed on Income exceeding AED 375,000

Almost all businesses have the same tax rate and thus its application is uniform and simple.

3. Deductions and Exemptions

In relation to taxable income deductions and exemptions are very important. operational costs like paying workers’ salary, rental space and electricity bills are all eligible for tax deductibility. Some income types such as dividends as well as capital gains can also be exempted.

Methods for Calculating Tax Returns

Corporates can select between two methods of accounting:

• Cash Basis Accounting Practice

• The entire inflows and outflows in terms of income and expenditure are as well recorded at the time of cash inflow or cash out flow.
• It is easier but does not always represent the actual financial position of the business.

• Accrual Basis Accounting Practice

• This method allows the recording of inflows and outflows when the income is earned or expenditure is incurred regardless of cash flowing in or out.
• It is appropriate for large enterprises as it allows a better view of the financial health of the business. 

Tax Return Filing in the UAE

Payment of tax returns in the UAE requires some steps to be followed. Companies are required to report accurately and follow the regulations set by the FTA.

Key Steps

1. Compilation of Financial Records
   Businesses/Firms should have their accounts done, particularly income account, profit and loss account and the account of expenditures.
2. Determination of Gross Income
   Take account of all income including the revenue from sales, associated interests, and other projected income.
3. Adjusting for Allowable Expenditures
   Formally eliminate expenses spent on specific operational activities from the gross income to calculate the taxable value.
4. Application of Tax Rates
   Impose the corporate tax rate of 9% on profits which exceed AED 375,000.
5. Submission of Tax Returns
   Tax declaration returns must be electronically submitted through the FTA online system. That cuts chances of errors and delays in returns.

Corporate Tax Return Calculation: Example

Example Calculation

Explanation:

• The receipts of the Company are AED 1,000,000. Available deductible expense accounts stand at 400,000 AED. 6 Net income is AED 600, 000, out of which suspiciously taxes may apply to AED 375,000. 
• From the profit that was taxable, AED 225, 000 is brought on record, on which 9 percent is applicable, therefore, tax liability turns out to be AED 20,250. 

Deductions and Exemptions in UAE Corporate Tax

Corporate tax laws in the UAE seem to allow different deductions and exemptions so as to encourage businesses and even reduce tax liabilities.

Common Deductions

• Operational Costs:Payrolls, salaries, rent, utilities and other such running expenditures. 
• Capital Expenditures: Machinery and equipment depreciation.
• Interest expense: The amount spent on business financing based on certain conditions.

Exemptions

• Dividends: Earnings from dividends.
• Capital Gains: A person or company accounts these as profits emerging from disposal of their assets.
• Government Grants: Certain funds offered under some government programs.

Taxable vs. Non-Taxable Income

• Taxable Income:-The type of income earned that is liable for tax, after deducting any expenses that are allowed. For instance, proceeds from sales and services.

• Non-Taxable Income:-This is income secured from taxation and hence exempted from corporate tax in most instances. These include dividends, certain capital gains, and government grants of particular types.

FTA Guidelines for Corporate Tax Compliance

The Federal Tax Authority of the UAE also known as the FTA offers guidelines in a bid to assist corporate right holders on how to comply with the respective tax laws. These include:

• Tax Computation: Guidelines of calculation of the amount that one will be taxed.
• Filing procedures: A set of guidelines of how to file tax returns on the FTA portal.
• Record Keeping: Settlement of accounts and other details in office accounts for minimum time set by the authority.

Role of Corporate Tax Consultants

In the UAE, corporate tax consultant services are part and parcel of the guarantee in the compliance with the regulations of the UAE tax system. These include:

• Tax Planning: Seeking items for deductions and items that can be legally avoided.
• Compliance: Accurately and in time Filing tax returns 
• Audit Preparation: Compiling documentation necessary for FTA audits together with other stakeholders of the business.

This expertise enables businesses to exploit tax relief opportunities and reduce the incidences of penalties and errors.

Avoiding Tax Penalties

Avoiding penalties is about ensuring compliance with all corporate tax laws. The following tips can be useful.

1. Be Diligent with Your Records
2. It is important to establish accurate records for all the business transactions.
3. Make Sure Returns Are Made Within the Cutoff Period
4. Ensure tax returns are submitted within fixed deadlines set by the FTA.
5. Speak to Experts
6. Handling numerous tax laws can be a challenging task hence working with tax consultants is prudent.
7. Be Informed

Amendments to FTA rules should always be monitored so that the compliance level is not compromised.

Conclusion

Preparation of corporate tax returns in the United Arab Emirates under its corporate tax regulations needs adequate planning and insensitivity to the guidelines given by FTA. Filing taxes in UAE becomes easier as businesses comprehend the procedure, make the most of deductions and exemptions, and seek tax advice from Corporate tax consultant. Given that the tax regimes in UAE are evolving, being aware of developments and adopting a proactive stance will be key to remaining compliant and avoiding undue penalties and fines.

                      Frequently Asked Questions (FAQs)

• What are the parameters through which corporate tax is calculated in the UAE?

Corporate tax is imposed on 9% on net profit of gross income of more than AED 375,000 minus allowable expenses.

2.   Which income is taxable in the line of corporate tax?
   Taxable income includes revenue derived from business activities after the deduction of expenses which can be implemented
3. Are there exemptions that apply to a particular category of income?
   Yes, exemption of capital gains dividends apply and some government approved grants.
4. What are allowable deductions?
   Allowable deductions include the cost of doing business, depreciation and cost of servicing a loan.
5. Which accounting methods are accepted for tax filing?
   Both cash basis and the accrual basis can be employed, although for the larger businesses, it is best to use accrual accounting.