With the implementation of Corporate Tax in 2022 across the UAE, the Ministry of Finance aims to strengthen the country’s status as a prominent global hub for investment. However, the new tax regime requires businesses and individuals to understand the central aspects of the scheduled Corporate Tax policy and how to calculate tax liability.
In this comprehensive blog, we will simplify the process and explain how Corporate Tax is applied to Taxable Income and how the tax liability is calculated in the UAE.
How to calculate tax liability – Corporate Tax
Understanding how to calculate tax liability can be a complex task, considering the various factors and calculations that are involved in this process. Moreover, doing this calculation on your own can be tedious and prone to errors. Hence, it is advised to seek assistance from the tax experts of Shuraa Tax who will provide accurate calculations, thereby saving you your time and effort.
Additionally, while calculating tax liability, you need to consider certain adjustments to determine your taxable income for the relevant period. Here we have explained some of the most important adjustments:
Basis of calculating taxable income
According to the Corporate tax regime of the UAE, the accounting net profit (or loss) stated in the financial statements must be the starting point for determining the taxable income of the business. After deducting all applicable deductions and excluding the exempted income, Corporate Tax is calculated at 9% of the net profit. Payment of any foreign taxes paid will also be reduced from the profit stated in the financial statement.
- Corporate Tax will be charged on the annual taxable income of a business in the UAE.
- The tax rate will be 0% for taxable income below AED 375,000 and 9% for income exceeding AED 375,000.
- The company must use the International Financial Reporting Standard (IFRS) for preparing financial statements.
Deductible Expenditures
- Expenses incurred on the entertainment of customers, shareholders, suppliers, and other business partners (meals, accommodation, transportation, admission fees, facilities, and equipment used for entertainment) can be deducted up to 50% of the total amount spent.
- 30% of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) will be Net Interest Expenditure.
- The Net Interest Expenditure amount excluded from deduction under the interest covering rules could be carried forward and deducted in the succeeding ten tax periods.
- As per the general interest limitation rule, if the loan was obtained, directly or indirectly, from a related party for the following transaction, then no interest deduction will be allowed:-
- dividends or profit distribution
- repossession, repurchase, reduction, or return of share capital
- capital contribution
- gaining ownership interest in a legal entity, if the individual is or becomes a related party after the acquisition
Non-deductible expenditures
- Exempt Income
- Capital in nature (Expenditure that is incurred wholly and exclusively for the Business of the Taxable Person should be tax deductible).
- Fines and penalties (apart from compensation for damages for breach of the contract)
- Dividend/profit distributed.
- Bribes and other illicit payments
- Donations paid (except to Qualified Public Benefit Entity)
- Recoverable input VAT
- Non-business expenses, such as Personal expenses
- Other expenses as specified by the cabinet minister.
- Taxes imposed outside the UAE
Tax loss relief
The tax loss relief is yet another important aspect of how to calculate tax liability.
- According to Article 37 of UAE Corporate Tax law, if a business suffers a tax loss in one tax period, it can be offset against the taxable income of succeeding periods. This provision helps reduce the taxable income of the company and lowers the Tax liability as well.
- At present, there are no limitation set on the time or duration these losses can be carried forward for tax relief. However, if the company offsets any tax loss carried forward against the taxable income of the next tax period, only then they can carry any leftover tax loss into the following period.
As per the current rules, companies cannot offset more than 75% of their taxable income with tax loss in any tax period. This is to ensure fairness and allow businesses to enjoy the benefits of Tax Loss Relief without mishandling the process.
Unrealized Gains or Losses
Any changes in the value of assets, such as unsold property would be classified under unrealized gains or losses. This is how it can affect the tax liability –
- If there is an increase in the value of an asset or investment that has not been realized in cash, it is an unrealized gain. For example, if stocks were bought at AED 200 per share and the price rose to AED 250 per share, then the unrealized gain would be AED 50 per share.
- On the contrary, if there is a decrease in the value of an asset or investment that has not been suffered in cash, then it is an unrealized loss. For instance, if an office space is purchased for AED 150,000 and the value decreases to AED 135,000, then there will be an unrealized loss of AED 15,000.
Companies can choose to recognize these gains or losses for calculating tax liability only when they are realized. This simply means unrealized gains are not taxable and unrealized losses are not deductible.
Exempt Income
To know how to calculate tax liability, it is crucial to understand different incomes that are exempt from the Corporate Tax in the UAE.
- Certain types of income such as personal income, foreign income, income from investments, income earned from real estate, businesses registered in the free zones, and businesses involved in the extraction of natural resources are not considered under Corporate Tax liability.
- Intra-group transfers of assets and liabilities among UAE resident companies with at least 75% common ownership are also relieved from the Corporate Tax rules. Through this provision, closely linked corporate groups in the UAE can enjoy smoother financial operations. However, to avail this relief, they need to maintain the assets and liabilities within the same group for at least three years.
Small Business Relief
The provision of Small Business Relief is to support start-ups and other small enterprises by reducing their tax burden and costs.
- A resident taxable entity can take advantage of the Small Business Relief if its revenue doesn’t exceed AED 3 million in the relevant tax period and in each of the previous periods. This means the business did not exceed the threshold, and hence will be treated as not having derived any taxable income. However, if its revenue crosses the mentioned threshold (AED 3 million) in any tax period, it will no longer be eligible for this relief.
- The Small Business Relief cannot be utilized by Qualifying Free Zone Persons (QFZP) or those part of a Multinational Enterprises Group (MNE Group) as stated in Cabinet Decision No. 44 of 2020.
- If the business chooses not to claim Small Business Relief for any tax periods, it can carry forward the Tax Losses or Net Interest Expenditures that were not allowed and apply them in future tax periods where the Small Business Relief is not applicable.
Conclusion
With an in-depth understanding of the new tax regime and the calculation of tax liability, you are well-equipped to navigate the tax landscape in the UAE effectively. However, if you are still thinking how do I know if I have tax liabilities, then Shuraa is always here to help. Get in touch with the tax advisors and auditors of Shuraa Tax and Accounting Consultancy for tax calculation support, guidance on corporate tax applications, tax planning, and navigating tax credits.
