How to Calculate Corporate Tax in UAE?

According to the UAE Ministry of Finance, Corporate tax is calculated at 9% of the taxable income. It is applicable for businesses which have an annual turnover exceeding AED 375,000. Corporate tax must be paid in UAE to comply with the country's tax laws and regulations. This article helps you to learn about the corporate tax and demonstrates how to calculate corporate tax in UAE with an example.

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What is Corporate Tax in UAE?

The United Arab Emirates introduced a federal Corporate Tax (CT) in June 2023. This tax applies to the net profits of most businesses operating in the country. The standard CT rate is 9%. However, businesses with annual taxable income below AED 375,000 are subject to a 0% tax rate. There is also a separate tax rate for large multinationals that meet specific criteria. This new tax system aims to diversify the economy and generate additional revenue for the UAE government.

How does the Corporate Tax Calculation work in UAE?

The formula to calculate corporate tax in the UAE is,

Corporate Tax = (Taxable Income - AED 375,000) * 9%

The following steps can be carried out to calculate the corporate tax in UAE

1. Prepare Financial Statements according to IFRS:

The first step in calculating your corporate tax in the UAE involves maintaining your financial records according to International Financial Reporting Standards (IFRS). This ensures consistency and transparency in your financial reporting.

2. Determine Net Profit:

Review your financial statements prepared using IFRS to determine the company's net profit. This represents your total revenue minus all expenses incurred during the specified period.

3. Identify and Apply Exempt Income:

• Research and identify any income exempt from corporate tax under UAE regulations. This might include:
• Dividends from UAE companies (with at least 5% ownership)
• Export income
• Free zone income (under specific conditions)
• Subtract the total exempt income from the net profit to arrive at the taxable income.

4. Apply the Corporate Tax Rate:

• The standard corporate tax rate in the UAE is 9%.
• Multiply the taxable income by the tax rate (9%) to determine the final corporate tax payable.

Example for Calculating Corporate Tax in UAE

The following table captures the corporate tax calculation process in UAE,

As shown in the table, starting with a net profit of AED 500,000, allowable deductions of AED 25,000 are subtracted, resulting in a taxable income of AED 475,000. After considering exempt income of AED 375,000, the remaining taxable amount becomes AED 100,000, which is subject to the 9% corporate tax rate, leading to a final tax liability of AED 9,000.

Conclusion

This article provided a clear explanation of corporate tax in the UAE, including its purpose, rate structure, and calculation steps. It also highlighted the importance of following UAE tax regulations and the availability of professional assistance for filing purposes. By understanding these points, businesses operating in the UAE can handle their corporate tax obligations.

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Get Started! Updated on: August 6th, 2024 10:18 PM