In this blog will walk you through how Corporate Tax is applied to your Taxable Income, how to compute your tax due, and how to take advantage of available tax credits.
What is Corporate Tax?
Corporate Tax is a direct tax levied on the taxable income of corporations and other businesses. It's also known as Corporate Income Tax or Business Profits Tax in other places.
In the UAE, Corporate Tax applies to companies, certain partnerships, unincorporated entities, and even natural persons conducting business activities.
What are the Applicable Corporate Tax Rates?
Corporate Tax in the UAE is calculated by applying specific rates to a Taxable Person's Taxable Income. General Tax Rates:
Taxable Income up to AED 375,000: 0%
Taxable Income over AED 375,000: 9%
A single Taxable Person can apply the 0% rate to their first AED 375,000 of Taxable Income once per Tax Period. This rule also applies to Tax Groups or Unincorporated Partnerships taxed at the partnership level. The 0% rate applies to the first AED 375,000 of the collective Taxable Income.
What is Taxable Income?
For Corporate Tax purposes, the tax base is known as a Taxable Person's Taxable Income.
Here's how it's determined:
Resident Persons: These entities are subject to Corporate Tax on their income from both within and outside the UAE. This means their global income is considered when calculating taxable income.
Non-Resident Persons: If they have a Permanent Establishment or a nexus in the UAE, they are taxed on the income attributable to that establishment or nexus. If they don't have a Permanent Establishment or a nexus but still derive income from the UAE, that income is subject to a withholding tax rate of 0%.
Natural Persons: Individuals are subject to Corporate Tax only on the taxable income from their business or business activities within the UAE. If their business activities outside the UAE are connected to those in the UAE, this income is also included.
- Qualifying Income is taxed at 0%, while Non-Qualifying Income is taxed at 9%.
- Non-Qualifying Income includes income from domestic or foreign permanent establishments, commercial property transactions with non-Free Zone Persons, and income from residential and non-commercial properties in a Free Zone.
Practical Example - Taxrate for Freezone Entities
What is the current Withholding tax rate?
At the time of enacting the Corporate Tax Law, the Withholding Tax rate was set at 0%.
This means that currently, no tax needs to be withheld by a Resident Person from a payment made to a Non-Resident for certain categories of State Sourced Income derived by the Non-Resident Person.
However, tax credits are given to Taxable Persons who have had Withholding Tax deducted from payments to them.
Can Withholding Tax Credit and Foreign Tax Credit can be used to offset Corporate Tax liability in the UAE ?
Taxable Persons in the UAE may be entitled to tax credits to offset their Corporate Tax liability. These credits arise when they have paid taxes on the same income either in the UAE or abroad.
The two main types of tax credits are Withholding Tax Credit and Foreign Tax Credit.
- Withholding Tax Credit applies to taxes deducted from cross-border transactions. Though the current rate is 0%, if it changes in the future, non-residents can reduce their Corporate Tax by the amount of Withholding Tax already paid.
- Foreign Tax Credit allows for the reduction of Corporate Tax by the amount of taxes paid on foreign-sourced income, with the credit capped at the UAE Corporate Tax rate on that income.
Practical Example for Tax Credits and Adjusted Corporate Tax payable
Key Takeaways
- Understanding Corporate Tax Application: Corporate Tax in the UAE applies to various entities, including companies, partnerships, unincorporated entities, and individuals conducting business activities. It is calculated based on specific tax rates applied to a Taxable Person's Taxable Income.
- General Tax Rates and Calculation: The UAE applies a 0% tax rate to the first AED 375,000 of Taxable Income and a 9% tax rate on income exceeding AED 375,000.
- Taxable Income Scope:
- Resident Persons: Taxed on their global income.
- Non-Resident Persons: Taxed on income attributable to a Permanent Establishment or nexus in the UAE.
- Natural Persons: Taxed only on income from business activities within the UAE.
- Expert Guidance on Corporate Tax Application: Fastlane Consultancy provides expert advice on how Corporate Tax applies to your specific business structure, ensuring you understand the implications for your Taxable Income.
- Accurate Tax Calculation Support: Our team helps you accurately compute your Corporate Tax liability by applying the correct tax rates and identifying all applicable deductions, ensuring compliance and optimal tax planning.
- Navigating Tax Credits: We assist in identifying and applying relevant tax credits, such as Withholding Tax Credit and Foreign Tax Credit, to minimize your Corporate Tax liability effectively.
- Comprehensive Tax Planning: Fastlane Consultancy offers comprehensive tax planning services, helping you optimize your taxes.
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