When doing business in the UAE, there's no way around paying taxes. The FTA (Federal Tax Authority) released a law on December 9, 2022, called Federal Decree-Law No. 47 of 2022 regarding corporate taxation. From June 1st, 2023 onwards, businesses have started paying the UAE Corporate Tax.
But who exactly is going to be taxed and how do you calculate the taxes for your company? We prepared the article about who should pay corp taxes in the UAE. Check it out by following this link.
In this article, we're going to take a closer look at how to calculate corporate taxes. We'll give you all the details you need to know about the process, and we'll even provide you with an algorithm for calculating taxes for your business.
The basis for calculating taxable income
The company's accounting net profit or loss is the basis for calculating corporate tax. The calculation is based on the financial statements and adjusted if necessary.
The standard corporate tax rate is 9%. It applies to the company's net profit after all benefits deduction and does not affect non-taxable income categories.
In addition, the payment of foreign taxes may be deductible from the accounting profit.
There are some details about corporate taxes that you should know:
- UAE corporate tax is levied on a company's annual taxable income
- For taxable income not exceeding AED 375,000, the corporate tax rate is 0%.
- The International Financial Reporting Standard (IFRS) is generally used to prepare financial statements in the UAE.
What types of expenses can I deduct from my taxes?
Here are some types of income you can exclude from tax:
Entertainment Expenses
Entertainment expenses for customers, shareholders, suppliers, and other business partners:
- Meals
- Accommodation
- Transport expenses
- Admission
- Entertainment equipment, etc.
You can deduct up to 50% of the amount incurred.
Interest Expenses
- You can deduct up to 30% of EBITDA for Net Interest Expenditure (“NIE”)
- Disallowed net interest expense can be carried forward for ten tax periods
A deduction may not be made for transactions in which the loan is received directly or indirectly from a related party for the following related party transaction:
- dividends/profit distribution
- redemption, repurchase, reduction, or return of share capital
- capital contribution
- or
- acquisition of an interest in a legal entity that is or becomes a related party after the acquisition
What are tax exemptions?
Companies can use tax losses to reduce their taxable income in future tax periods. However, they can only offset up to 75% of taxable income in any given period. Any remaining tax losses you can carry forward indefinitely to future tax periods.
The UAE corporate tax law allows for the transfer of tax losses between group companies:
- Where there is 75% or more common ownership
- If certain other conditions are met, such as having the same fiscal year and using the same accounting standards
- Not being an exempt person or qualifying free zone person
Under CT law, a taxpayer can carry forward and use losses only in some cases:
- The same shareholder or shareholders own at least 50% of the company's total shares from the start of the year when the loss happens. They need to keep that ownership interest until the end of the year to use it to offset their taxable income with the loss.
- If there's a change in who owns more than half of a business, they can still carry forward tax losses as long as the new owners are in the same or a similar type of business.
Note that the following losses are not eligible to get tax deducted:
- before the CT effective date
- before a person becomes a CT taxpayer
- from activities or assets that generate income that's not taxable
- incurred by a person resident in a free zone that is not attributable to a PE resident on the mainland
What to do with unrealized gains or losses
Unrealized gains and losses occur when a company holds an asset or liability whose value has changed but has not been sold or disposed of yet. For example, if a company's real estate goes up, that's a gain, but if it hasn't been sold yet, it's unrealized. These gains and losses will show up on the books of the company, even though they haven't taken place yet.
Based on the CT Law, a taxpayer may elect to do the following:
- Recognize gains and losses on a "realization basis". This means that any unrecognized gain will not be taxed until it is realized. On the other hand, any unrecorded loss is not deductible.
- Recognize gains and losses "on a realization basis" for assets and liabilities that are held in a capital account. This means that any unrealized gains or losses on capital accounts, such as assets and liabilities, are not taxable or deductible until they are realized.
Unrealized gains and losses on income account assets and liabilities are still included in your current year's taxable income.
What is excluded income?
UAE-based companies will have to pay tax on their worldwide income, including any capital gains. But to avoid double taxation, some types of income won't be taxed.
Participation Exemption
Corporate shareholders usually don't have to pay taxes on dividends and other profits they receive from a foreign company in which they have an interest.
Other income will be excluded from UAE corporate taxes, as long as the participating interest is met:
- foreign exchange
- depreciation
- capital gains or losses from both residents and non-residents
What does the participating interest mean?
- At least 5% ownership;
- A 12-month continuous holding period or intent to hold for 12 months;
- The Participation is subject to tax in the country or territory in which it is located at a rate that is not less than 9%;
- Up to 50% of the direct and indirect assets in the partnership are shares or rights that wouldn't qualify for a corporate tax exemption if held directly by the person paying taxes;
- Also, it includes any conditions imposed by the Minister;
If all of the above conditions are met, the investment will be considered to meet the taxable criteria:
- The main goal and activity of participation is to buy and hold shares or equity interests that meet the requirements for participation.
- Also, the income from the participation during the relevant tax year or years is mostly from the profit from the shares.
The participation exemption is not available for 2 years if you acquired the participation by purchasing something that didn't meet the participation requirements, or if the purchase was part of a group or reorganization.
Foreign Permanent Place of Business Exemption
A resident individual may establish a PE (permanent establishment) in another country based on the local tax laws of that country. Any income from this foreign PE will be subject to tax in that country.
The UAE CT (corporate tax) law allows residents to exempt this income from tax in the UAE. Сompanies can choose:
- Claim an exemption for the profits of their foreign branch
- It is possible, if the foreign PE (whatever that is) is subject to taxes in the other country that are at least 9%. But if you choose this exemption, you won't be able to count any losses, income, expenses, or foreign tax credits related to the foreign PE in the UAE.
- Claim foreign tax credit for foreign branch taxes paid
- The maximum foreign tax credit you can claim will be the lesser amount you paid in taxes in the other country or the UAE corporate tax that would be due on the income from that country.
International Transportation Exemption
If you earn income from leasing or running planes or ships, it's not subject to corporate tax if:
- Such income from a non-resident
- The leased aircraft, vessel, or related equipment is used for international transportation under a reciprocal agreement with another country.
Group reliefs
Transfers within a qualifying group
The CT law gives tax breaks for transferring assets or debts between companies in the same group called the Qualifying group.
The Qualifying group includes people who:
- Members are legal entities that are UAE residents or non-residents with a permanent establishment in the UAE
- Either one owns 75% or more of the other, or some third party owns at least 75% of both companies;
- No one is an exempt person;
- Nobody is not a Qualifying Free Zone Person;
- Members use the same accounting standards in preparing their financial statements.
There won't be any changes in the value of assets or debts if they are transferred between two taxpayers who are in the same qualifying group.
The changes possible if:
- there's a transfer of those assets or debts outside the group within 2 years of the initial transfer
- a person who made or received the transfer is no longer part of the group
Business restructuring relief
The UAE's corporate tax law gives tax breaks for mergers, split-offs, and other corporate reorganizations, where a whole or part of a company is transferred in exchange for shares or other ownership stakes. This is as long as certain conditions are satisfied:
- The transfer is made according to the applicable regulations in the UAE;
- The taxpayers are residents or non-residents who have a PE in the UAE;
- None of the persons will be considered an exempt person or a qualifying free zone person;
- Members have the same fiscal year. They prepare their financial statements using the same accounting standards;
- The transfer is made for valid commercial or economic reasons.
If there's a transfer of shares or ownership interest between two businesses as part of a restructuring, there won't be any taxable gains or losses on the deal.
But if there's another transfer to a third party in the next two years, or if you sell the stock, then any gains or losses from the first transfer will be counted in the year when the second transfer happens.
Small Business Relief
If you're a small business owner, you can claim some tax relief. To be eligible, your revenue for the current tax year and the past two years has to be less than AED 3 million.
Carryover of "tax loss" and "excess net interest expense" is allowed for tax periods in which small business relief is not elected. If you artificially separate your business to take advantage of small business relief, anti-abuse rules apply.
Relief is not available to:
- Qualifying Free Zone Persons
- Entities that are part of multinational groups with consolidated group revenues exceeding AED 3.15 billion.
