Computation of Corporate Tax

Computation of Corporate Tax starts from the profit as per the income statement of the company. Always remember, the stand-alone financial statement needs to be taken for starting the Corporate Tax. The consolidated financial statements need to be taken only in case of the Corporate Tax computation of a tax group.

So the starting point is accounting for profit/loss before tax. From these figures, there are 8 adjustments to be made to arrive at the profit, which will be taxable as per the rates mentioned above.

Below are the adjustments to be made.

1. Deduct any exempt income

As per UAE Corporate Law if such incomes are included in the accounting profit before tax. As per Article 22 of UAE Corporate Tax Law, there are 5 incomes that are considered exempt income. These are mainly dividends and capital gains arising from the sale of shares, income from a foreign permanent establishment (for example: a foreign branch), and non-resident companies operating aircraft or ships in UAE. Want to know more regarding this, Click here.

2. Unrealized gains or losses adjustments.

UAE Corporate Tax allows the companies to elect to tax on a realization basis. In simple words, if there is a real estate asset in your company name, the value of the assets may go up every year, as per the market, and this gain is recorded in your income statement. If you choose to tax on a realization basis, such profits shall be excluded from your accounting profit while determining taxable income. Please note that this election is irrevocable.

3. Gains or losses arising from qualifying group transactions.

In simple words, if there are 2 or more companies where the 75% shareholder is common, at the time of transferring the assets or liabilities between the companies, if there are any gains or losses incurred that are recorded in the income statement, you can exclude them while calculating Corporate Tax Liability. Click here to know more about this relief.

4. Non-deductible expenditures

As per UAE Corporate Tax Law, which are recorded in your income statement, shall be added back while calculating Corporate Tax. This is very important for all businesses, and let us discuss further on this concept.

a) What are the expenses deductible under UAE Corporate Tax Law?

All the expenses that are wholly and exclusively for business purposes, not personal in nature and not capital in nature, can be deducted while calculating Corporate Tax.

b) What are the non-deductible expenses while calculating Corporate Tax?

(i) Donations, gifts, and grants given to non-qualifying public benefit entities: the list of public benefits entities has been published by authority through Cabinet Decision No. 37 of 2023.

(ii) Fines, penalties, bribes, and illicit payments: The fines paid against a contractual obligation can be deducted, whereas other fines are fully disallowed while calculating Corporate Tax.

(iii) Dividends, profits, and distributions to: Profits to owners are not expenses to the companies. The dividends are always after Corporate Tax.

(iv) Drawings of personal usage: If the owner of the company has any drawings from the company in the form of goods or services, such drawings are disallowed.

(v) Recoverable input VAT: Any VAT amount that is recoverable under UAE VAT Law shall be disallowed as an expense for calculating the Corporate Tax.

 (vi) Entertainment Expenses: Any expenses for entertaining the customers, suppliers, and owners are disallowed 50%, whereas entertainment expenses for employees are 100% allowed. 

(vii) Interest Capping Rules: In a year, the taxable person can consider the interest as allowable expenses higher than the below;

• AED 12 million
• 30% of earnings before interest, tax, depreciation, and amortization.

(viii) Personal expenses: Any expenses that are not related to business and personal in nature are fully disallowed.

(ix) Losses incurred on non-taxable activities: Any losses incurred on the activities of the taxable person that are non-taxable cannot be allowed as an expense while calculating Corporate Tax. Example: A natural person who is a taxable person is having a loss on his personal real estate investment that cannot be considered while calculating his taxable income from business or business activities while calculating UAE Corporate Tax.

(x) Expenses incurred for Exempt Income: Any expenses incurred towards exempt income shall be disallowed, except interest incurred for generating exempt income. Example: Broker fees paid for acquiring shares are disallowed if the dividends from shares are exempt income.

 (xi) Reasonable apportionments: If any expenses are incurred for both business and personal expenses, a reasonable apportionment is required while computing Corporate Tax. Example: - A taxable person using his residence for business purposes.

 (xii) Any other expenses as per ministerial and cabinet decisions

5. Transfer of Losses within Qualifying Groups:

If any losses are transferred from Qualifying Groups (where 75% or more shareholders are common), a necessary adjustment shall be made while calculating Corporate Tax. 

6. Transfer of with Related Parties and Connected Person:

Any transactions of a taxable person with their related parties on connected persons shall be adjusted as per Arm’s Length Principle (ALP) while calculating Corporate Tax.

7. Any incentive or Tax relief announced by the authority

8. Any other adjustments by Authority. 

From the accounting profit in the income statement/profit and loss account, we can arrive at the taxable income. This Taxable income is considered for the computation of Corporate Tax in the UAE. Below is one sample calculation of Corporate Tax liability:-

An LLC follows the calendar year as a financial year for Corporate Tax purposes.

An LLC has a profit in the income statement of AED 1,000,000 during the taxable year 2024.

An LLC received AED 200,000/- as a dividend from B LLC, where A LLC is the 20% shareholder; this income is included in the accounting profit.

Further, A LLC paid AED 20,000/- towards traffic fines in 2024.

An LLC paid AED 10,000/- towards entertainment expenses for employees and AED 50,000/- towards entertainment expenses for customers.

Calculate the Corporate Tax liability of an LLC for the tax year 2024.

To substantiate the statement given at the beginning of this article that the UAE has an effective tax rate of less than 9%, let us put another calculation

Total Taxable income AED 845,000/-

Total Corporate Tax liability AED 42,300/-

The effective rate of UAE Corporate Tax in this case is 5% (AED 42,500/ AED 845,000)*100.

To learn more about How is Corporate Income Tax Calculated?, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.