UAE corporate tax is calculated by applying the UAE Corporate Tax Law to the company’s taxable income. Taxable income may include profits from selling goods or services, interest, investment income, rental income, and other business income. To compute the appropriate taxable income, businesses deduct allowable expenses and exempt income from the accounting income, subject to the rules under the UAE Corporate Tax Law.
Formula: How Corporate Tax Is Calculated
To calculate corporation tax, the company must determine its taxable income. The Federal Tax Authority uses the following formula to derive the amount of corporation tax due.
Applicable corporate tax rate x Taxable income = Corporation tax due
The taxable income is generally calculated from the accounting income after applying the required tax adjustments, deductions, exemptions, and reliefs.
- Obtain the company’s accounting income by reviewing the net profit or loss shown in the financial statements. Accounting income may include earnings from sales, interest, commission, rent, and various other sources. The company then applies the relevant corporate tax adjustments, including allowable expenses, exempt income, non-deductible expenses, and other adjustments required under the UAE Corporate Tax Law.
- The UAE Corporate Tax Law allows deductions for business expenses that meet the required conditions, but unsupported or non-deductible expenses should not be deducted when calculating taxable income.
Calculation of Tax
Companies in the UAE calculate their corporate tax on taxable income, not simply on total revenue or net profit shown in the financial statements. After deducting allowable expenses, excluding exempt income, and applying the required tax adjustments, the standard rate is 0% on taxable income up to AED 375,000 and 9% on taxable income exceeding AED 375,000.
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 the accounting income and then apply the adjustments, deductions, exemptions, and reliefs permitted under the UAE Corporate Tax Law.
Step 2: Apply the following formula to get the taxable income: Taxable income = Accounting income plus or minus corporate tax adjustments.
Step 3: The last step in calculating the corporation tax liability of a UAE company is to apply the applicable corporate tax rate to the taxable income.
Use our corporate tax calculator to automate these steps
Example:
During the current fiscal year, ABC Corporation has realized AED 500,000 accounting profit from its operations. The corporation can take deductions of up to AED 100,000. Now, determine ABC Corp.’s corporation tax liability.
Solution:
Taxable income is calculated after deducting allowable expenses and applying the relevant corporate tax rules.
To calculate income subject to taxation, subtract all allowable deductions from the accounting income.
So,
Taxable Income: AED 400,000 = AED 500,000 minus AED 100,000
Amount subject to 9% corporate tax: AED 25,000 = AED 400,000 minus AED 375,000
Corporation Tax: AED 2,250 = AED 25,000 x 9% standard corporation tax rate
Thus, ABC Corporation is liable for AED 2,250 as corporation tax in UAE.
How to Reduce Corporation Tax Legally in UAE
Businesses that engage in tax planning have the legal ability to reduce their taxable income where the law allows. Tax planning alternatives, which should not be confused with illegal or unethical ways e.g. tax evasion, are permissible. They allow businesses in the UAE to avoid paying excess tax where deductions, exemptions, reliefs, and other lawful positions apply, but this will entail planning with the help of corporate tax accountants in UAE.
Chartered accountants in the UAE can reduce their clients’ tax liabilities by making use of tax deductions, reliefs, and exemptions that are available under UAE Corporate Tax Law. 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 money for the government to fund public services including infrastructure, national defense, 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 allowable business expenses from their taxable income where the required conditions are met. In addition, the taxpayer may be able to use eligible losses and bad debts according to the UAE Corporate Tax rules.
If you run a company in the United Arab Emirates, you may be obligated to calculate, report, and pay corporate tax where applicable. 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 to do 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!
