The Corporate Tax Law, formally known as Federal Decree-Law No. 47 of 2022, was issued on October 3, 2022, and published in the Official Gazette on October 10, 2022. With the deadline for the UAE’s first corporate tax return fast approaching, all professionals involved in the process must be well versed in the accurate calculation of corporate tax. This article provides a simplified, step-by-step guide for calculating corporate tax in the UAE

Step 1: Determine If Your Entity Is Subject to Corporate Tax

Corporate tax applies to:

• UAE mainland and free zone companies (with exceptions)
• Foreign companies with a Permanent Establishment (PE) in the UAE
• Individuals conducting business under a commercial license

Exemptions include:

• Businesses involved in natural resource extraction
• Government entities and qualifying public benefit entities
• Qualifying investment funds
• Certain free zone entities (subject to qualifying conditions)

Step 2: Determine the Applicable Tax Rate

Taxable Income (AED)

Corporate Tax Rate

0 – 375,000

0%

Above 375,000

9%

Free Zone (Qualifying Income)

0%

Free Zone (Non-Qualifying Income)

9%

Multinational groups meeting the OECD Pillar Two threshold (€750 million revenue) may be subject to a 15% global minimum tax starting 1 January 2025.

Step 3: Compute Your Accounting Net Profit

 The corporate tax computation begins with your net profit before tax as per your audited financial statements, which must be prepared in accordance with IFRS (International Financial Reporting Standards).

Step 4: Adjust to Arrive at Taxable Income

Adjust the accounting profit by:

• Adding back non-allowable expenses
• Removing exempt income
• Applying transfer pricing adjustments if required

Only business-related expenses are deductible. Personal expenses are fully disallowed, and mixed-use expenses require appropriate allocation and documentation.

Common Disallowable Expenses

Type of Expense

Disallowance Rate

Entertainment expenses

50%

Donations to non-qualified entities

100%

Fines, penalties (excluding contractual damages)

100%

Bribes, illicit payments

100%

Dividends or similar payments to owners

100%

Withdrawals by owners or directors

100%

Corporate tax paid/payable

100%

Recoverable input VAT

100%

Foreign income tax (tax relief may be available as a foreign tax credit)

100%

Unpaid employer contributions for employees

100%

Interest expense (beyond 30% of EBITDA or AED 12M cap)

Disallowed

 Formula:

Taxable Income = Accounting Net Profit ± Adjustments

Step 5: Apply the Tax Rate

Once taxable income is calculated:

• 0% rate applies on the first AED 375,000
• 9% applies to income above that threshold

Additional Considerations: Elections and Reliefs

Taxable persons may voluntarily elect the following without FTA approval:

1. Small Business Relief
2. Exemption for income from a foreign permanent establishment
3. Realization basis for gains/losses
4. General tax rate (for qualifying free zone entities opting out of 0%)
5. Qualifying group transfer relief
6. Business restructuring relief
7. Transitional relief

Transitional Rule for 2024

1. Opening Balance Sheet Requirement:

·         Businesses must prepare an opening balance sheet as of the start of their first tax period.

·         This is used as the starting point for calculating taxable income under the new law.

·         The opening balance sheet should generally reflect the company’s closing balances from the prior financial year (e.g., 31 Dec 2023 for those with a calendar year-end).

2. Asset and Liability Adjustments:

·     Certain assets and liabilities (like intangible assets, immovable properties, or financial instruments) may need to be adjusted to fair value.

·         This ensures that gains or losses accrued before the tax law came into effect are not taxed unfairly.

3. Excluded Gains:

·         If a company wants to exclude certain pre-Corporate Tax gains from future taxation (like revaluation gains), it must make an election in its first tax return.

Important Notes

• Tax calculation begins with the net profit from the audited financial statements, which are prepared in accordance with IFRS
• Arm’s length pricing must be used for all related party transactions, with proper documentation
• The election choices for the realization and transitional basis must be made in the first tax yea
• Maintain supporting schedules and evidence for all adjustments

Final Thought

To ensure accurate tax computation, both the consultant and the company must have a clear understanding of the calculation basis. This is critical for maintaining compliance and preventing avoidable issues with the FTA.