With the introduction of Corporate Tax in the UAE, it is essential for businesses to understand how to determine their corporate tax liability. The tax regime, effective from June 1, 2023, aims to align the UAE with international tax standards while ensuring fair contribution from companies toward national development.
This detailed blog breaks down the calculation process step-by-step, provides illustrative examples, and includes key considerations for businesses operating across different sectors and legal structures.
Overview of UAE Corporate Tax Rates
- 0% Tax Rate: On annual taxable income up to AED 375,000
- 9% Tax Rate: On annual taxable income exceeding AED 375,000
- 15% Minimum Rate: For large multinational entities meeting OECD Pillar Two thresholds (EUR 750 million global revenue)
The tax applies to all UAE-based legal entities including Free Zone companies (except for qualifying income under specific conditions), mainland companies, and foreign entities with permanent establishment (PE) in the UAE.
Step-by-Step Guide to Calculating Corporate Tax
Step 1: Determine Total Revenue
Calculate all revenue earned by the business during the financial year. This includes sales, service fees, rental income, and any other form of business revenue.
Step 2: Deduct Allowable Business Expenses
Only expenses that are wholly and exclusively incurred for the business are deductible. Common deductible expenses include:
- Employee salaries and benefits
- Office rent and utilities
- Marketing and advertising costs
- Professional services fees
- Depreciation as per capital allowance rules
- Certain entertainment expenses (within limits)
Step 3: Calculate Accounting Profit
Accounting profit = Total revenue – Total allowable expenses
Step 4: Adjust for Tax Add-backs and Deductions
Adjust your accounting profit by adding non-deductible expenses (e.g., fines, penalties) and subtracting exempt income (e.g., qualifying intra-group dividends or capital gains).
Step 5: Arrive at Taxable Income
Taxable Income = Adjusted Profit – AED 375,000 threshold (for small businesses)
Step 6: Apply the Corporate Tax Rate
Tax Liability = 9% × Taxable Income (above AED 375,000)
Example of Corporate Tax Calculation
Example: A company reports AED 1,200,000 in total annual income and AED 500,000 in business expenses.
- Accounting Profit = AED 1,200,000 – AED 500,000 = AED 700,000
- Taxable Income = AED 700,000 – AED 375,000 = AED 325,000
- Corporate Tax = 9% × AED 325,000 = AED 29,250
Key Considerations
- Free Zone entities must segregate qualifying and non-qualifying income to enjoy 0% tax benefits.
- Transfer pricing rules apply for related-party transactions and must be documented.
- Carry forward of tax losses is allowed (up to 75% of taxable income per year).
- Foreign tax credits are available for taxes paid abroad on income also taxed in the UAE.
How PEAK Business Consultancy Services Can Help
Corporate tax compliance can be a complex task, especially when navigating exemptions, special zones, transfer pricing, and group taxation rules. PEAK Business Consultancy Services specializes in helping UAE businesses of all sizes with accurate tax computation, return filing, and compliance planning.
Our team of experts can review your financial records, assist in identifying all eligible deductions, and prepare a full tax liability assessment aligned with UAE Federal Tax Authority (FTA) guidelines.
Visit www.peakbcs.com to schedule a free consultation or inquire about tailored tax support packages for your business.
Deadlines to Keep in Mind
- Tax period is typically aligned with the financial year (e.g., Jan–Dec or Apr–Mar).
- Corporate tax return must be filed within 9 months of the end of the financial year.
- Failure to file on time may lead to administrative penalties and interest charges.
Conclusion
Calculating your corporate tax liability correctly is crucial for ensuring full compliance and avoiding financial penalties. With the right planning and expert advice, businesses can minimize tax exposure while adhering to the UAE’s legal requirements.
For personalized corporate tax planning, expert VAT guidance, or setting up your accounting system for compliance, trust the professionals at PEAK Business Consultancy Services.
