Corporation tax is determined by applying UAE regulations to the calculation process. Profits from selling goods or services, incentives, interests, investment income, and rentals are the various components that make up a company's taxable income. Deductions and exemptions that are legally permissible are subtracted from the profits to compute the appropriate taxable income.
Formula to Calculate Corporation Tax UAE
The taxable income of the company must be determined in order to calculate the corporation tax. The formula that is used in deriving the amount of corporation tax due to the Federal Tax Authority is as follows:
Corporation tax rate x Taxable income = Corporation tax due
The taxable income is equal to the adjusted gross income minus all the applicable deductions.
Obtain the company's Adjusted Gross Income by subtracting the appropriate adjustments from the gross income. Income from sales, interest, commission, rent and all other sources is referred to as Gross Income. Early withdrawal penalties, staff expenses, operating expenses, and all other company expenditures are all included in the applicable adjustments.
Itemized deductions are allowed by the UAE tax authority, but if a taxpayer does not claim them, no deduction would be applied.
How to Calculate UAE Corporation Tax
Let's go over the fundamental stages involved in calculating a company's corporation tax:
Step 1: To calculate the amount of income that is subject to UAE corporation tax, you must first determine your adjusted gross income as well as the deductions that are permitted by the tax authority.
Step 2: Apply the following formula to get the taxable income: Income subject to taxation is equal to adjusted gross income minus the allowed deductions.
Step 3: The last step in how calculating the corporation tax liability of a UAE company: multiply the tax rate by the amount of income that is subject to taxation:
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Example:
During the current fiscal year, ABC Corporation has realized AED 500,000 net profit from its operations. Deductions of up to AED 100,000 are permitted to be taken by the corporation. The corporation tax rate that applies to the business is 9% Now, determine ABC Corp.'s corporation tax liability.
Solution:
Taxable Income multiplied by the applicable tax rate results in the corporate tax due of ABC Corporation.
Income subject to taxation Is calculated by taking the adjusted gross income and subtracting all allowable deductions.
So,
Taxable Income: AED 400,000 = AED 500,000 minus AED 100,000
Corporation Tax: AED 36,000 = AED 400,000 x 9% standard corporation tax rate
Thus, ABC Corporation is liable for AED 36,000 as corporation tax in UAE.
How to Reduce Corporation Tax Legally in UAE
Businesses that engage in tax planning have the legal ability to lessen their taxable income. Tax planning alternatives, which should not be confused with illegal or unethical ways e.g. tax evasion, are permissible. They allow businesses in UAE to steer clear of paying excessive amounts of tax but this will entail planning with the help of corporate tax accountants in UAE.
Chartered accountants in UAE are able to reduce their clients' tax liabilities by making use of a variety of tax deductions, refunds, and exemptions that have been authorized by the UAE Federal Tax Authority. These experts have a comprehensive understanding of the laws governing taxes, as well as tax administration and financial planning.
Read also - Deductible & Non-Deductible expenses under corporate Tax in the UAE
Advantages of Corporation Tax in UAE
The aphorism that "when businesses prosper, the country's economy grows" is something that all of us have heard. But how exactly does this process work? The answer lies in corporation tax.
The benefits of corporation tax in the UAE are as follows:
- Unbiased and impartial taxation: corporation tax is collected from registered businesses that meet the criteria set by the authorities under UAE Corporate Tax law in an equitable way, regardless of the industry.
- Increased government revenue: corporation taxes bring in a significant amount of money for the government to fund all public services including infrastructure, national defence, and public transportation. They are all dependent on the money that the government generates from the imposition of taxes.
- Deductions on tax liability: Businesses can deduct the cost of employee medical insurance, wages, and other employee expenses from their taxable income. In addition to this, losses and bad debts might also be subtracted from the total amount that is taxable.
If you run a company in the United Arab Emirates, you are obligated to make tax payments. The UAE Federal Tax Authority will not send you a charge for the amount that is owed by your business for corporation tax. You're responsible for determining, reporting, and paying the company's tax liability. Should you fail in doing so, the consequences of your company's failure to pay its taxes on time can be severe. Talk to the corporate tax accountants of Corporate Tax UAE today to help ensure compliance with UAE tax legislation!
Sources:
https://www.mof.gov.ae/en/resourcesAndBudget/Pages/faq.aspx
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.