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UAE Corporate Tax Rates: How to Calculate your tax liability

UAE Corporate Tax Rates: How to Calculate your tax liability

5 months ago

20 June 2022

KPI

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    UAE is tax heaven for a long time! Entrepreneurs and small business owners were coming to Dubai and other Emirates from all over the world to live their dreams. For the corporate tax-free, business-friendly environment. To thrive. To achieve.

    Time changes and business environment changes. International obligations and the legal environment changes. Change is investable. So is the tax environment.

    The UAE's Ministry of Finance has released a public consultation document. The document contains information and primary aspects of the proposed UAE CT regime. The purpose of the document is to seek the views and comments of business communities and other interested parties. Interested people may provide their comments on or before 19 May 2022.

    Now that the change is coming soon, and UAE is introducing corporate taxes, it is important to consider:

    • what kind of corporate tax rates will be applied on business profits?
    • whether the rates will be high as in the developed world?
    • are there restrictions on expenses that can be deducted from business revenues? what are the restrictions?

    These were the questions bothering the business owners in the UAE.

    Here is our attempt to help you understand the new tax laws proposed to be introduced soon.

    Before talking about the rate, it is good to know the rate will be applied on what? on the profits? Which profit? How the profit is calculated? What adjustments are made to the profits?

    Let us try to get answers to these questions

    1. Accounting Profits


    The accounting net profit or loss is the starting point for determining the taxable income.

    What are the accounting profits? How do we calculate accounting profits?

    • Accounting profits are the profits earned by the Entity / Legal or natural persons. Profits as shown in the Financial Statements of the Entity.
    • Financial statements should be prepared using accounting standards and principles.
    • The alternative financial reporting standards and mechanisms are available for certain taxpayers. For example, startups and small businesses

    2. Are all taxpayers required to get their accounts audited?


    For free zone entities, the audit of financial statements is mandatory.

    For mainland Entities, the requirements are not clear. We have to wait for the Law.

    3. Will there be a uniform accounting year?


    No, the corporate tax is applicable for financial years starting on or after 1 June 2023. Companies can continue with their existing financial period as their corporate tax year.

    For example, if a business follows April to March as its financial year, the first corporate tax year would be from 1 April 2024 to 31 March 2025.

     

    4. What are the Corporate Tax rates in UAE?


    UAE proposes to have a slab-based CT rate:

    • Taxable income up to AED 375,000 – CT rate is 0%
    • Taxable income over AED 375,000 – CT rate is 9%

    5. Are all income taxed in the hands of a taxpayer?

     

    UAE resident companies will be subject to UAE Corporate Tax on their worldwide income, including capital gains. However, the following income is exempt from Corporate taxes. 

    Dividends and Capital Gains

    • Dividends and capital gains earned from the sale of shares of a subsidiary.
    • Domestic dividends earned from UAE companies
    • Dividends received from UAE Free Zone companies are exempt. (even though the income of such companies is taxed at a 0% CT rate).
    • Dividends received from foreign companies
    • Capital gains from the sale of shares in both UAE and foreign companies will be exempt subject to two conditions:
      • The recipient shareholder holds at least 5% of the shares of the subsidiary, and 
      • a foreign subsidiary is subject to CT of at least 9%.

    Profits from foreign branches: 

    A taxpayer with the foreign branch(es) may select either of the two options for all of their foreign branch profits:

    • Claim foreign tax credit for taxes paid in the foreign branch country, or
    • Elect to claim an exemption for their foreign branch profit (tax rate in the jurisdiction must be equal to or more than UAE CT rate).

    An option once selected will be irrevocable.

    Income from leasing or operating aircraft or ships:

    Income from activities like leasing or operating aircraft/ships is exempt from taxation if the following conditions are met:

    • Such income is earned by a non-resident
    • The leased assets are used in international transportation (provided the reciprocal arrangement is in place with the foreign jurisdiction).


    6. Expense Deduction limitations:

    Are all expenses allowed as deductions?

    The P&L Account shows the accounting net profit after deducting all the costs and expenses incurred for the business.

    However, not all expenses incurred by a business are allowable as deductions to arrive at taxable income. 

    What does this mean? It means that non-deductible expenses will be added back to the accounting profits to arrive at the taxable income. CT is payable on taxable income.

    7. Which expenses are not allowed?


    The following expenses are not allowed as deductions. They are added back to accounting profits.

    • Administrative Penalties
    • Recoverable
    • Donations are paid to non-approved institutions or organizations.

    The above expenses are not deductible in their entirety. In addition, there are some partially allowed expenses. These expenses are allowed a deduction with certain limits.

    • Entertainment expenses: 50% of the expenditure incurred to entertain customers, shareholders, suppliers, and other business partners will be allowable deductions.
    • Interest payment: allowable interest will be capped to 30% of earnings before interest, tax, depreciation, and amortization as adjusted for CT purposes.

    Moreover, payments or benefits to Connected Persons will be allowed as expenditure only if the business can demonstrate that:

    • such expenses were incurred wholly and exclusively for the business purposes, and
    • it corresponds to the market value of the services provided.

    In addition to the above, if a Free Zone person wants to avail of 0% CT tax, then its mainland UAE group company will not be allowed deductions of payments made to such Free Zone Person.

    8. How will unrealized gains or losses be treated?


    Unrealized gains or losses on capital items are not considered when calculating taxable income. However, unrealized gains or losses on revenue items are to be considered when calculating taxable income.

     

    9. How to compute payable tax?


    Corporate tax will be calculated after making adjustments to Accounting profits as follows:

    Particulars Amount (AED)
    Net Profit/loss as per the financial statement xx
    Add/Less: Adjustments as per the CT legislations xx
    Taxable Income  
    Taxable Income up to AED 375,000 @0% (A)
    Taxable Income above AED 375,000 @9% (B)
    CT Liability A + B
    Less: Foreign Tax Credit xx
    CT Payable xx

    The Wrap...


    Businesses should prepare their financial statements as per the generally accepted accounting principles.

    It is a good idea to get the current year’s financial statements audited, (the year before the UAE CT comes into effect).

    This would be beneficial as it would be easier for Tax Authorities to consider or rely on the opening balances, wherever required.

    Businesses must critically analyze the various expenses that might be disallowed in the future. Evaluate such expenses, analyze the impact on taxation, and, prepare and implement an alternative approach.

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