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.
  

Taxable Income for Different Business Structures

Free Zone companies and Mainland companies are two categories that have different calculations of taxable income, mainly because of their respective regulatory and tax incentive methods. Generally speaking, Mainland companies are supposed to pay corporate tax at the standard rate, based on net income after some allowable deductions. For example, Free Zone companies are generally exempted from or enjoy preferential taxation or have preferential tax rates if their income is sourced entirely from Free Zone operations or is international. Income sourced from the UAE Mainland remains taxable, however.

To get a better comparison of tax incomes of Free Zone and Mainland companies, see more

Taxable Persons and Exempt Persons in UAE

Taxable Persons

• UAE Resident Entities: Businesses operating in UAE or businesses with a permanent establishment in UAE.
• Foreign Businesses with a Permanent Establishment: Foreign companies having business in the UAE.
• Non-Qualifying Zone Entities: Those businesses outside Free Zones or not exercising exempt activities.
• Companies with taxable income: The income above AED 375,000 is subject to corporate tax at 9%.

Exempt Persons

• Qualifying Free Zone Entities: Tax-free for a specific period of 15 to 50 years.
• Government Entities: Exempt depending upon the nature of its activities.
• Natural Resource Businesses: Companies, that involve oil and gas, or those having government contracts, are exempted from tax.
• Foreign businesses without any connection with UAE: Tax-exempt on foreign earnings.

How to Report Taxable vs. Non-Taxable Income

Taxable Income

• Identify Taxable Income: Wages, business profits, rental income, and interest are considered taxable income. You are mandated to report these on your tax return.
• Report Taxable Income: All the taxable income needs to be indicated on the tax return form by filling out the appropriate sections, such as salaries, business revenue, and investment gains.
• Review Exemptions and Deductions: Check tax laws relating to specific exemptions, such as the tax-free allowance or deduction on foreign income, to ensure they are appropriately applied.
• Track All Sources of Taxable Income: Proper records of all sources of taxable income would avoid errors in any filing and correctly file.

Non-taxable income

• Nontaxable Income Identification: Some government entitlements, gifts, and inheritances are included in nontaxable income. This source of income should not be reported in taxes.
• Reporting Nontaxable Income Separately: Though nontaxable income is nontaxable, it still may have to be accounted for in your return for transparency purposes. Refer to the tax laws of your locality on how to report such income.
• Account for All Non-Taxable Income Sources: Proper records, even if the income is not tax-paying, must be maintained for clarity and proper reports.
• Consult with a Professional Tax Advisor: In case you are not sure whether some type of income is taxable or should not be reported, consult the opinion of a tax expert so that you strictly adhere to relevant tax laws.

UAE Corporate Tax Law

• Federal Decree-Law No. 47 of 2022

It established the UAE corporate tax regime and the corresponding rates, exemptions, and rules regarding foreign income and taxable persons.

• Federal Decree-Law No. 60 of 2023

The original law on corporate tax was amended to clearly state exemptions and compliance requirements set forth in order to meet international standards.

• Cabinet Decisions and Ministerial Decisions

The rules governing the implementation of corporate tax must clearly be made around the following: what is taxable, reporting requirements, exemptions, and compliance measures.

• Branch Offices of Foreign Companies

Offshore branches of foreign enterprises operating in the UAE are typically subject to a flat corporate tax of 9% unless located within qualifying Free Zones or engaged in specified exempt activities. Such branches need to comply with the laws of UAE taxation and file their returns accordingly, in time.

Overall, the UAE provides a competitive tax environment to businesses, especially in Free Zones. For companies engaged in strategic industries or foreign income, the UAE provides very low tax rates. While a 9% corporate tax would hardly align with most of the rest of the world, it appears to align with international investment or non-qualifying zones.

Resident and Non-Resident Persons in the UAE Corporate Tax System

Resident Person

• Resident persons are considered to be business entities or individual taxpayers whose place of effective management is situated in the UAE or who have a permanent establishment in the UAE.
• A business will be regarded as a resident if it is incorporated within the UAE or if the business operations are mainly carried out in the jurisdiction of the UAE, which shall include a Free Zone or on the Mainland.
• Resident businesses of the UAE will be taxed on all their income worldwide, except the business entities that fall within a specified exemption or foreign-source income exemptions as stipulated within the Double Taxation Agreements.

Non-Resident Person

• Non-resident persons are those who are businesses or individuals not domiciled or not treated as having a permanent establishment in the UAE.
• In general, non-residents would normally be taxed to corporate tax in the UAE only on income concerning which they are treated as liable to tax under the UAE domestic law, for instance, business activities carried out within the UAE or from a permanent establishment in the UAE.
• General principle of Income otherwise sourced by non-residents outside the UAE, it is not liable to UAE tax.
• In other words, for certain conditions, and mainly if they have income flows associated with UAE operations, non-residents will also be liable for a certain tax withholding or other obligations.

Corporate Tax Rates in UAE

Standard Corporate Tax Rate

The UAE has made it mandatory to have a 9% corporate tax rate for profits above AED 375,000. Profits below AED 375,000 are taxed at 0%. It is a relief for small businesses or start-ups. The tax rate applies to businesses operating on the Mainland or in areas without special exemptions.

Tax Exemptions in Free Zones

Those firms established in qualifying Free Zones are often exempt from paying some taxes for 15 to 50 years, depending on the zone and nature of business. It means, that after the exemption period, such businesses may have to pay the regular corporate tax rate of 9% unless they fall into certain categories that qualify them for such incentives based on their respective activities.

Zero Tax Rate for Qualifying Activities

Some sectors like natural resources, oil and gas, or government contracts can enjoy zero tax rates so that such lucrative sectors can attract considerable investments in the targeted industries. It also goes to Free Zones businesses in whose qualifying activities will fall within the strategic economic objectives of the UAE.

 Foreign Income

The UAE does not tax foreign income, thus excluding businesses from corporate tax income acquired outside the UAE. However, a company will be considered taxable on incomes yielded in the UAE in case it owns a permanent establishment in the UAE. Local and international tax rules are to be adhered to.

Permanent Establishments in UAE

• Foreign Permanent Establishments in UAE

Foreign companies with permanent establishments in the UAE, including branch offices, come under the ambit of corporate taxation applicable in the UAE. The tax may be imposed on such income as the situation may dictate and of course whether such income falls within qualifying zones or not.

• Domestic Permanent Establishments in UAE

Taxation of domestic PE operations in the UAE would normally accrue based on income that stems from activities outside qualifying zones or those that do not meet tax incentives qualification. These would include assets owned by businesses or the doing of real estate-related deals by a company that did not qualify as a business for purposes of the tax incentive.

In both cases, tax liability will depend on the type of business activities and location of the operations, though tax rates tend to be higher for businesses operating outside of Free Zones or non qualifying zones.

Qualifying Free Zones in the UAE

Dubai Free Zones

• Dubai Multi Commodities Centre (DMCC): It is a free zone for commodities trading and business services. DMCC offers tax incentives with the qualification of getting tax exemption for income derived from qualifying activities for a definite period.
• Dubai Airport Free Zone (DAFZA): The businesses within this free zone qualify for tax-free periods, with preferential tax treatment of income derived from eligible activities like aviation and logistics.

Abu Dhabi Free Zones

• Khalifa Industrial Zone Abu Dhabi (KIZAD): KIZAD offers tax breaks to the extent that many generations of income from qualifying activities would not be subject to taxes for a considerable number of years.

RAKEZ (Ras Al Khaimah Economic Zone)

RAKEZ offers heavy exemptions and allowances along with special tax rates on income from qualifying activities.

Jebel Ali Free Zone (JAFZA)

One of the biggest free zones in the UAE is JAFZA.. This medium provided companies with various benefits such as the exemption of profits from tax for some period, especially for manufacturing, trading, and service companies.

Tax incentives in Freezone

Operating companies in these free zones receive several tax incentives including the following:

• Corporate tax exemption for a specified number of years.
• Exemption of import and export duty.
• Lower tax for business operations involving qualifying activities.
• Full ownership of the business without the need to have a local sponsor.

Jurisdiction of Mainland UAE

Dubai Mainland

Companies operating within Dubai Mainland fall outside the Free Zones, and income sourced in this jurisdiction is generally subject to normal UAE corporate tax rates unless the activities are exempted under particular conditions.

Abu Dhabi Mainland

Companies operating in Abu Dhabi Mainland also fall on the general corporate tax rate for income derived from non-exempt activities conducted outside the Free Zones.

Sharjah Mainland

Companies in Sharjah Mainland are taxed at standard rates except if they qualify for certain tax benefits; like other Mainland jurisdictions.

Income earned from activities outside qualifying zones or exempt categories is generally taxed at standard UAE corporate tax rates, mainly in these areas of the mainland.

Government Regulatory Authorities in the UAE Corporate Tax 

• Federal Tax Authority (FTA) in UAE

The FTA exercises control over and implements corporate tax obligations in the UAE. It ensures that business filing and the payment of taxes is done on time and monitors the audits carried out.

• Ministry of Finance

The Ministry of Finance governs the corporate tax policies of the UAE. This includes defining what constitutes qualifying income, tax exemptions, and de minimis rules which are small or insignificant amounts of tax that are not subject to compliance.

• Organization for Economic Co-operation and Development (OECD)

The OECD leads global tax policy development, and naturally, this impacts the development of the United Arab Emirates' tax policy. Recommendations regarding worldwide tax standards and BEPS significantly influence the framework of corporate taxes in the UAE.

These authorities combined to ensure a structured approach to the regulation, compliance, and enforcement of taxation in the UAE.

Tax Treaties and International Income

1. Double Taxation Agreements (DTAs)

What are DTAs?

DTAs are double-tax treaties between two countries meant to prevent income from being taxed twice. For instance, DTAs might provide a beneficial tax position for a UAE-based business that earns money outside by exempting it from both UAE and foreign tax obligations.

How DTAs Affect Your Taxes

DTAs help to provide for the avoidance of double taxation on foreign earnings by clarifying how taxes are divided between two nations. This therefore commonly results in lower tax liabilities and higher profitability, hence promoting investments that cut across borders.

2. Considerations of Foreign Income

How Taxes are Charged to Foreign Income in the UAE

The UAE generally does not tax income from outside of the country, so a business with overseas earnings will have an overall benefit. For instance, if your business in the UAE earns money abroad, the UAE corporate tax is generally not applicable. However, laws of taxation in that other country may still be applicable and should be studied in detail to ensure compliance.

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.