What is Subject to Corporate Tax in UAE?

Hey there!

Understanding what’s subject to corporate tax can feel like navigating a maze, but I’m here to guide you through it. We’ll cover the basics, from taxable income to allowable deductions, and even touch on transactions with related parties. Ready? Let’s dive in!

Taxable Income: The Basics
First things first, what is taxable income? It’s the amount of income that’s subject to corporate tax.

Here’s how it breaks down:

Resident Persons: Subject to corporate tax on their income from both inside and outside the UAE.

Non-Resident Persons with a Permanent Establishment or Nexus in the UAE: Subject to corporate tax on income attributable to that establishment or nexus. If they don’t have a permanent establishment or nexus but derive income from the UAE, that income is subject to a 0% withholding tax.

Natural Persons: Only subject to corporate tax on the taxable income of their business activities derived from the UAE, or from outside the UAE if connected to their UAE business activities.


Calculating Taxable Income
To figure out your taxable income, you start with your annual accounting income, which comes from your financial statements prepared according to accepted accounting standards like IFRS. Here’s a simplified version of the steps:

1. Start with Accounting Income: This is the net profit or loss as per your financial statements.
2. Make Adjustments: Apply any necessary adjustments as per tax laws to this accounting income.
3. Determine Taxable Income: The adjusted amount is your taxable income.

For businesses that already maintain accepted financial statements, these can be used to calculate taxable income, reducing the need for multiple sets of records.

Accepted Accounting Standards

In the UAE, the accepted accounting standards for corporate tax purposes are:

 - International Financial Reporting Standards (IFRS)
 - IFRS for SMEs: For businesses with revenue of AED 50,000,000 or less in the relevant tax period.

Administrative Simplifications
Becoming subject to corporate tax might introduce new requirements for maintaining financial statements.

However, there are simplifications to ease this transition:

 - Small Business Relief: Eligible businesses might not need to calculate taxable income and have reduced record-keeping requirements.
 - Cash Basis Accounting: Businesses with revenue under AED 3,000,000 can use cash basis accounting instead of accrual basis, which might simplify things.

 - Transactions with Related Parties
When dealing with related parties or connected persons, you need to follow the arm’s length principle. This means transactions should be conducted as if they were between independent parties. The UAE applies transfer pricing rules to ensure this principle is upheld.

Tax Losses and Transitional Rules
Tax losses can be carried forward and offset against future taxable income, helping to reduce your tax burden in profitable years. Transitional rules are also in place to ease the shift to new tax regulations.

Practical Case Study: Company Y
Scenario: Company Y, a QFZP, wants to calculate its taxable income.

 - Accounting Income: Company Y reports an accounting income of AED 5 million.
 - Adjustments: Company Y makes adjustments for allowable deductions, such as depreciation and certain business expenses.
 - Taxable Income: After adjustments, Company Y’s taxable income is AED 4 million.
 - Apply Tax Rates: Company Y applies the 0% rate to the first AED 375,000 and 9% to the remaining amount.
By following these steps, Company Y determines its corporate tax liability accurately.

Why It Matters
Understanding what’s subject to corporate tax helps you manage your business finances better and ensures compliance with tax laws. It also allows for better financial planning and strategy.

Need Help?
Feeling overwhelmed? Fastlane is here to help. We’re corporate tax experts ready to guide you through these complexities, ensuring your business stays compliant and efficient.
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