Corporate Tax : Taxable and Non-Taxable Income

Effective tax planning requires a thorough understanding of taxable and non-taxable income, which enables firms to maximise their financial plans and comply with tax regulations while maximising after-tax profits.

Corporate Tax

Corporate tax was implemented on June 1, 2023, with a standard rate of 9% for businesses earning more than AED 375,000. The UAE's corporate tax laws include excellent taxing systems aimed at growing the country's economy, supporting businesses in achieving worldwide standards, and avoiding illegal tax actions.

What is Taxable Income?

The Taxable Income is the income of a Taxable Person that is liable to Corporate Tax under the UAE Corporate Tax Law.

Resident Persons: These entities are subject to Corporate Tax on all income earned within and outside of the UAE. This means that their whole income is used for determining taxable income.

Non-Resident Persons: If they have a Permanent Establishment or a nexus in the UAE, they are taxed on the income earned through that establishment or nexus. If they do not have a Permanent Establishment or a nexus yet receive income from the UAE, that income is subject to a 0% withholding tax rate.

Natural Persons: Individuals are only subject to Corporate Tax on taxable income from their businesses or business activities in the UAE. If their business activities outside of the UAE are linked to those in the UAE, this income is included.

How is taxable income calculated for corporate tax purposes?

To calculate taxable income, the adjustments specified in Section 6.2.2 are applied to a Taxable Person's annual Accounting Income, which should be derived from Financial Statements prepared in accordance with accepted accounting standards, such as the International Financial Reporting Standards (IFRS) or IFRS for SMEs for entities with revenue of AED 50,000,000 or less.

Businesses that already have acceptable financial statements can use them to compute taxable income, as long as any adjustments  are well-documented. This technique reduces administrative overhead while ensuring consistency.

 Taxable Income Calculation :

Taxable Income (TI) = Accounting Income (AI) + Adjustments (Section 6.2.2)

Accounting income is based on financial statements prepared in accordance with accepted accounting standards (IFRS or IFRS for SMEs with revenue ≤ AED 50,000,000).

How is Accounting Income Adjusted to Determine Taxable Income?

When computing Taxable Income, a Taxable Person's Accounting Income must be adjusted as follows:

•  Unrealized gains and losses.
•  Exempt Income
• The deductions
• Reliefs for specific transaction types.
• Transfer Pricing Adjustments (for transactions involving Related Parties or Connected Persons)
•  Tax losses.

What expenses are not deductible or considered taxable income when calculating corporate taxes?

• Non-business-related expenses and losses.
• Expenses linked with exempt income.
• 50% of entertainment expenses are for customers, shareholders, suppliers, and other business partners.
• Fines and penalties, excluding compensation.
• Certain Donations and Grants
• Bribes or other illegal payments.
• Dividends, profit distributions, or benefits paid to the owner of a taxable entity.
• Corporate, Recoverable, and Foreign Taxes

Non-taxable income in the UAE Corporate Tax

In the UAE, not all income is subject to corporation taxes. The UAE's Ministry of Finance has released a list of non-taxable income. However, it is recommended that tax specialists in Dubai assist in determining whether the income is non-taxable. Non-taxable income in the UAE includes the following:

• Individual salaries and income received through work will be exempt from the UAE corporation tax.
  
• Individuals' personal real estate investments will not be subject to UAE corporation tax. However, this is only applicable if the individual is not required to get a commercial licence or permit to do such activity in the UAE.
  
• Dividends, capital gains, and other income derived from personal ownership of shares or other assets will be exempt from corporate tax in the UAE.
  
• The UAE will not collect corporate tax on interest and other revenue received by individuals through bank deposits or savings programs.
  

Conclusion

In conclusion, understanding the difference between taxable and non-taxable company income is key for effective tax planning. At Reyson Badger, we provide expert advice to help your company negotiate these rules. Our team of experts guarantees that you receive the best tax benefits while remaining compliant.