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how to determine the Taxable Income for Free Zone Persons (QFZP) that isn't Qualifying Income and is subject to the 9% corporate tax rate. This might sound a bit technical, but we'll break it down in a simple and straightforward way. Grab a cup of coffee, and let's get started!
What is Taxable Income?
Taxable Income is the portion of your income that doesn't qualify for tax-free status under the Qualifying Income category. To figure out how much of your income is taxable at the 9% rate, you start with your total income and subtract any Qualifying Income and exempt income. Easy, right?
What Reliefs Can't QFZPs Benefit From?
As a QFZP, you won’t be able to enjoy some reliefs available under the Corporate Tax Law. These include:
- Small Business Relief
- Qualifying Group Relief
- Business Restructuring Relief
- Tax Loss Transfers
- Membership in a Tax Group
Practical Case Studies
Let’s see how this works with a couple of examples.
Case Study 1: Company L
Company L is a QFZP with the following income:
Free Zone Parent: AED 1,000,000 (All Qualifying Income)
Domestic Permanent Establishments: AED 500,000
Foreign Permanent Establishments: AED 5,000,000 (Company L decides not to consider this income, so it's exempt)
Here's how we determine the Taxable Income:
Qualifying Income: AED 1,000,000 (0% tax rate)
Taxable Income: AED 500,000 (subject to 9% tax rate)
So, Company L will pay:
0% on AED 1,000,000 = AED 0
9% on AED 500,000 = AED 45,000
Case Study 2: Company M
Company M, another QFZP, has the following financials:
Adjusted EBITDA: AED 72,000,000
- Taxable Income: AED 42,000,000
- Qualifying Income: AED 30,000,000
Net Interest Expenditure: AED 36,000,000
- Taxable Income: AED 27,000,000
- Qualifying Income: AED 9,000,000
To determine how much interest expense can be deducted, we use the greater of:
- 30% of adjusted EBITDA for Taxable Income: 30% of AED 42,000,000 = AED 12,600,000
- AED 12,000,000
Company M can deduct AED 12,600,000 in interest expenses for Taxable Income. So, after this deduction, they will calculate their taxable profits and apply the 9% tax rate accordingly.
Case Study 3: Company M (Another Scenario)
Let’s tweak the numbers for Company M:
Adjusted EBITDA: AED 36,000,000
- Taxable Income: AED 20,000,000
- Qualifying Income: AED 16,000,000
Net Interest Expenditure: AED 18,000,000
- Taxable Income: AED 9,000,000
- Qualifying Income: AED 9,000,000
In this case, the Net Interest Expenditure for Taxable Income is less than AED 12,000,000. So, the deduction will be AED 9,000,000.
Why It Matters
Understanding how to calculate your Taxable Income correctly ensures you're compliant with tax laws and helps you avoid overpaying taxes. It’s all about optimizing your tax strategy and making the most of your Free Zone status.
Need Help?
Feeling a bit lost? Don’t worry, that’s why Fastlane is here. We’re experts in corporate tax and can help you navigate these rules. We'll make sure you understand your obligations and optimize your tax strategy.
So, let’s make tax calculations simpler and keep your business on the right track!
