Recently, the United Arab Emirates (UAE) announced that it will introduce a federal corporate tax on business profit from the beginning of June 1, 2023. All UAE businesses except those engaged in the extraction of natural resources will be subject to this new tax regime. For taxable income up to AED 375,000, the tax applied will be at rate of 0%; and for a taxable income exceeding AED 375,000, the tax will be at rate of 9%. We will guide you through the process of computing tax returns under UAE Corporate Tax law in this article.
How to Compute Tax Returns under UAE Corporate Tax?
The Accounting Income is the beginning point for determining Taxable Income. It is the accounting net profit or loss for a relevant Tax Period, using the accounting and reported Financial Statements, in accordance with IFRS, IFRS for small and medium-sized entities (IFRS for SMEs), or the income and expenditure statement reported by Taxable Persons applying the Cash Basis of Accounting.
Article 20(2) of the Corporate Tax Law specifies specific adjustments to be taken into account in regard to Accounting Income in order to determine the Taxable Income for Corporate Tax purposes. The next table summarizes adjustments made to the Accounting Income to get to Taxable Income:
| Adjustment | Description |
|---|---|
| Unrealized gains or losses | Any unrealized gains or losses on assets or liabilities that are subject to fair value or impairment accounting under the applicable accounting standards. |
| Exempt Income | Any income that is exempt from Corporate Tax under the provisions of the Corporate Tax Law. |
| Reliefs | Any reliefs that are available under the Corporate Tax Law, such as group relief, loss carry forward relief, and investment allowance. |
| Deductions | Any deductions that are allowed under the Corporate Tax Law, such as depreciation, interest expense, and bad debt provisions. |
| Transactions with Related Parties and Connected Persons | Any transactions with related parties and connected persons that are not at arm's length. |
| Tax Loss relief | Any tax losses that can be carried forward to future tax periods. |
| Incentives or special reliefs for a Qualifying Business Activity | Any incentives or special reliefs that are available for qualifying business activities. |
| Any income or expenditure that has not otherwise been taken into account | Any income or expenditure that has not been taken into account in determining the Taxable Income under the provisions of the Corporate Tax Law. |
| Any other adjustments as may be specified by the Minister | Any other adjustments that may be specified by the Minister of Finance. |
Calculation of Corporate Tax Payable
Once Taxable income of the relevant tax period is determined, it is subjected to Corporate tax at the following rates:
- 0% of the exempt part of the Taxable Income, up to AED 375,000
- AED 9%, on the part of the Taxable Income exceeding AED 375,000.
Corporate Tax will be payable at the following rates by a Qualifying Free Zone Person:
- 0% on Qualifying Income.
- 9% on the other Taxable Income that is not Qualifying Income.
First, Corporate Tax liability is reduced by Withholding Tax Credit, then by Foreign Tax Credit to get to Corporate Tax Payable or refundable.
The Withholding Tax rate applicable in UAE as of date is 0%. Nevertheless, and until the Cabinet Decision specifies the income categories subject to Withholding Tax, which is not yet in place, Withholding Tax is not yet applicable in the UAE.
FAQs
- What is the effective date of the UAE Corporate Tax?
UAE Corporate Tax will be effective from 1st June 2023. - How much is Corporate Tax in the UAE?
Corporate Tax rate in the UAE is at 0% on that amount of Taxable Income that is below AED 375,000 and 9% on that amount of Taxable Income, that is above AED 375,000.
When must the Corporate Tax return be filed?
The Corporate Tax return is to be filed within 9 months from the end of the relevant Tax Period. - Can tax losses be carried forward?
Tax losses can be carried forward and will be used to offset future taxable income, up to 5 years.
Conclusion
The UAE corporate tax regime, which will come into effect on or after June 1, 2023, will have a significant impact on businesses operating in the UAE. The tax rate of 9% will apply to annual taxable profits exceeding AED 375,000, while net profits up to this amount will be tax-free. Businesses should study the impact of the new tax regime, and get professional advice to secure compliance and minimize their taxation.
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