Basis of Taxation
A. Resident persons will be liable to corporate tax only in respect of the income which is earned from a business activity carried out in the UAE. It will apply equally to all categories of profits and other income computed on a net basis, as reported in the financial statements prepared in accordance with internationally accepted accounting standards.
Determination of residential status for the purpose of Corporate Tax:
Legal persons incorporated in the UAE will automatically be considered residents of the UAE.
Natural Person carrying on any business or commercial activity in the UAE will be considered a resident person.
3. If the Foreign Company is effectively managed and controlled in the UAE, then it will be considered a resident of the corporate tax regime.
B. Non-Resident will be liable to pay corporate Tax in UAE on:
Income earned from Permanent establishments in the UAE.
Income sourced in the UAE.
Basis of calculating taxable income
Corporate tax will be levied on the accounting net profit (or loss) stated in the financial statements of a business. Accounting Standards and principles accepted in the UAE would be used in the preparation of financial statements. The financial accounting period will be used as the annual tax period by the business. In case a business does not have a financial accounting period, then the Gregorian calendar year (Jan-Dec) would be used by default.
Corporate Tax Rate and Threshold Limit
Corporate tax will be charged upon the taxable income consisting of business profits arrived at after making adjustments in accordance with the UAE tax laws.
Corporate tax will not be charged on the business profits up to the threshold limit of AED 375,000 (USD 100,000).
Income in excess of AED 375,000 (USD 100,000) will be taxed at the rate of 9%.
Income from Qualifying Free Zones
Tax rate on Qualifying income - 0%
Tax rate on Non-qualifying income - 9%
No advance payments of corporate tax will be required to be made by businesses.
Expense Deduction Limitations
Expenses incurred wholly and exclusively for business are deductible in the Tax Period, in which these are incurred.
Certain expenses are disallowed or are restricted while computing income for the purpose of corporate tax in order to make sure that only those expenses which are incurred for the purpose of earning taxable income are deductible. This has also been done to prevent abuse of excessive deductions.
Payments made to related parties located in free zones which avail the benefit of 0% corporate tax would not be deductible for the purposes of corporate tax. However, if such payment is attributed to a mainland branch of the free zone person, then the related party would be entitled to claim a deduction.
Further, the following expenses would not be allowed as deductions:
Bribes or other illicit payments.
Donations, grants or gifts paid to an entity that is not an approved public benefit entity.
50% of the expenditure incurred in relation to entertaining customers, shareholders, suppliers, and other business partners would be allowed as a deduction.
Interest expenditure shall be deductible in the Tax Period in which it is incurred. However, interest deduction limitation rule has been put in place as under:
1. Net interest expenditure shall be deductible up to 30% of the taxable Person’s accounting earnings before the deduction of interest, tax, depreciation and amortization (EBITDA) for the relevant Tax Period, after excluding any Exempt Income.
2. The disallowed interest expenditure will be allowed to be carried forward for next 10 taxable years and will be included in the current period’s interest to calculate the Net Interest Expenditure.
3. A taxable person’s net interest expenditure for a tax period is the amount by which the Interest expenditure incurred during the tax period, including the amount of any net interest expenditure brought forward, exceeding the taxable interest income derived during that same period.
The limitation rule is not applicable upon banks, insurers and a natural person engaged in business etc.
Interest Deduction Limitation Rule on Loans from Related Party
1. No deduction shall be allowed for interest expenditure incurred on a loan from a related party, if taken with an intent to gain corporate tax advantage, in respect of any of the following transactions:
A dividend or profit distribution to a related party.
A redemption, repurchase, reduction or return of share capital to a Related Party.
A capital contribution to a Related Party.
The acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition.
2. If the income arising out of interest to the recipient related party is taxable in the UAE or foreign jurisdiction at the same or higher rate, then the interest deduction limitation rule will not apply.