Calculating Corporate Tax Payable: A Comprehensive Overview

United Arab Emirates (UAE) has recently enacted a new Corporate Tax Law which may have vast consequences for the businesses operating within the country. According to the UAE’s Corporate Tax Law, any company that has a turnover of more than $816,000 (AED3 million) must pay a 9% tax. This article seeks to help the organization come up with a corporate tax calculation guide for determining the corporate tax payable under the new corporate tax law.

Corporate Tax Payable under Corporate Tax Law

Under the UAE Corporate Tax Law, the following types of income are subject to UAE corporate tax for the specified entities and individuals:

1. Businesses and individuals conducting activities under a commercial license in the UAE:

• Income from sales of goods and services
• Income from investments, including interest, dividends, and capital gains
• Income from rental properties and other real estate activities
• Income from any other business activities conducted in the UAE

For a detailed impact of tax laws on businesses, read more here: Impact of UAE Corporate Tax on Businesses and Tax Evasion.

2. Free zone businesses (that comply with all regulatory requirements and do not conduct business set up in the UAE’s mainland):

• Income derived from activities conducted within the designated free zone area
• Income from transactions with mainland UAE businesses provided that the free zone business meets the conditions for maintaining its tax incentives

Discover more about the free zone conditions and exemptions here: Qualifying Activities and Excluded Activities for Free Zones.

3. Foreign entities and individuals conducting a trade or business in the UAE in an ongoing or regular manner:

• Income derived from activities carried out through a permanent establishment in the UAE
• Income from providing services or performing contracts within the UAE
• Income from the sale of goods and services to customers in the UAE

For more details about the taxation of foreign entities, check this guide: Corporate Tax for Foreign Companies in the UAE.

4. Banking operations:

• Income from interest, fees, commissions, and other banking-related activities
• Income from investments, including interest, dividends, and capital gains
• Income from foreign exchange transactions and other financial services

5. Businesses engaged in real estate management, construction, development, agency, and brokerage activities:

• Income from the sale, lease, or rental of real estate properties
• Income from real estate development, construction, and management services
• Income from agency and brokerage fees related to real estate transactions

Explore how real estate-related activities are taxed under the UAE corporate tax regime here: Real Estate Sector and Corporate Tax.

Allowable Deductions

For purposes of computing Taxable Income any reasonable business expense, incurred and paid solely for the purpose of earning Taxable Income can be deduced. Some of the allowable deductions are as follows;

• Salaries and wages
• Rent and utilities
• Depreciation and amortization expenses
• Interest rates (maximum of 30% of EBITDA).
• Entertainment of clients (completely 50 percent tax deductible).

For a deeper understanding of deductible and non-deductible expenses, check out this guide: Deductible and Non-Deductible Expenses for Corporate Tax in UAE.

Nevertheless, certain costs are not allowable for the corporate tax computation, including;

• Bribes
• Fines and penalties (exclusive of compensations for loss or breach of contract)
• Donations, grant, or gift received by a non-qualifying public benefit organization
• Cash and/or other distributions of dividends and other profits.

Corporate Tax Rates

The UAE Corporate Tax Law that was recently passed outlines the headline tax rate of 9% for all taxable income greater than Dh 3 million. However, there are specific categories of income whose corporate tax liability is different from the rest of the income. For example:

• The revenue generated from oil and gas operations and exploration is charged under the progressive tax system.
• Royalties arising out of the exploitation of natural resources do not attract corporate taxes.
• Any income arising from business and commercial activities in the free zones may not be subject to corporate tax under some circumstances.

 

Table 1: UAE Corporate Tax Rates

Type of Income	UAE Corporate Tax Rate (%)
Income up to Dh 3 million	0%
Income on top of Dh 3 million	9%
Large corporations that meet particular requirements established in relation to "Pillar Two" of the OECD Base Erosion and Profit Shifting Project (with consolidated global turnover surpassing EURO 750 million, equivalent to AED 3.15 billion).	Other applicable tax rates

Tax payment process

1. Register for corporate tax: Currently, only the companies that earn an income of more than AED 3 million in a year, those companies whether being residents or some non-residents, the firms operating in free zones too, are liable to register for corporate tax.
2. Maintain records and documentation: Every person who is subject to taxes is required to retain the records and documents for a period of not less than seven taxation years after the close of the particular taxing period.
3. File annual corporate tax returns: Every person who is liable to pay Corporation Tax has to complete and file yearly tax returns no later than nine months after the end of the period of account.

 

FAQs

• What is corporate tax payable?

Corporation tax payable is the amount of tax that a company has to pay based on the taxable income. 

• How is corporate tax calculated?

Corporate tax is computed by identifying a company’s taxable income and multiplying this income by the statutory corporate tax rate and also use a corporate tax calculator. 

• What are the corporate tax rates in the UAE?

The UAE Corporate Tax Law prescribes a standard rate of 9% on the taxable income exceeding Dh 3 million. However, there may be different tax on such incomes depending on the type of income earned. 

• How do I determine taxable income for corporate tax purposes?

To arrive at the taxable income, the business needs to identify total income, and then deduct any exempted income or/and allowable deductible expenses. 

• What deductions are allowed when calculating corporate tax?

Business expenses incurred wholly and exclusively to carry on a business for the profit or gain of which Taxable Income is derived may be deducted.

 

Conclusion:

the UAE Corporate Tax Law introduces major changes to companies and other individuals operating in the UAE. Considering the distinctions in types of taxable income subject to corporate tax, entities can work to meet these requirements and properly administer the corporate tax payable. It is advisable to consult expert corporate tax consultant and be up to date with the new tax laws to effectively manage the changes.