Liable Incomes on Corporate Tax in Dubai

Liable incomes on corporate tax refer to the categories of income subject to taxation under the UAE's corporate tax framework. All annual taxable profits that fall under AED 375,000 shall be subject to a zero rate. All annual taxable profits above AED 375,000 shall be subject to a 9% rate. Liable incomes include various forms of business profits, including revenue generated from goods and services, investment returns, and other business-related earnings. Understanding these liable incomes is crucial for businesses operating in Dubai, as it directly impacts their tax obligations and overall financial planning. Accurate identification and reporting of these incomes are essential to ensure compliance with local regulations and optimize tax liabilities.

The UAE introduced a 9% corporate tax in June, but businesses operating in free zones have special rules. A 0% corporate tax rate in Dubai provides substantial benefits to businesses that are operating in free zones. The framework of corporate tax in Dubai is distinctive and advantageous, providing companies with substantial benefits.

Who Needs to Register for UAE Corporate Tax?

All businesses and entities operating in the UAE that generate taxable income are required to register for corporate tax, regardless of their revenue. Corporate tax registration applies to both juridical persons, such as corporations, and natural persons who are self-employed and meet the income criteria.

The primary groups required to register for corporate tax in the UAE include:

• Resident and Non-resident Businesses: All businesses and individuals conducting business activities within the UAE, whether based in the mainland or free zones, need to register and obtain a Corporate Tax Registration Number.
• Free Zone Entities: Businesses within the UAE's free zones are also mandated to register, even if they are eligible for a 0% tax rate on specific incomes. Registration ensures compliance and readiness for any tax obligations.
• Entities Exceeding AED 375,000 in Revenue: Although all businesses are required to register, taxable income under AED 375,000 is exempt from tax. However, businesses earning above this threshold must pay corporate tax at the applicable rate.
• Inactive Businesses: Even if a business is inactive, it must still register for corporate tax to avoid penalties for non-compliance.

In summary, the UAE’s corporate tax registration requirement encompasses nearly all business types to enhance transparency and streamline tax administration across the country

Who is Exempted from UAE Corporate Tax?

Certain entities and activities in the UAE are exempt from corporate tax, specifically to support social welfare and specific sectors. These exemptions include:

• Government Entities: UAE federal and local government bodies are fully exempt from corporate tax, allowing them to focus on non-commercial activities.
• Extractive and Non-Extractive Natural Resource Businesses: Companies engaged in the extraction of natural resources, such as oil and gas, are exempt from corporate tax under the UAE's existing tax regime for natural resources
• Charities and Public Benefit Organizations: Registered non-profit organizations, including charities and other public benefit organizations, receive exemptions to support their non-commercial activities aimed at public welfare.
• Pension and Social Security Funds: Public and private pension funds, as well as social security funds that provide retirement benefits, are exempt from corporate tax, aligning with the government’s social security goals
• Investment Funds: Investment funds, particularly qualifying investment funds managed by authorized financial institutions, are also exempt, incentivizing capital investments in the UAE.
• Wholly-Owned UAE Subsidiaries of Exempt Entities: UAE-based subsidiaries fully owned by tax-exempt entities may also qualify for exemption, provided they engage only in qualifying transactions and do not carry out other taxable commercial activities

These exemptions aim to boost economic development, support government objectives, and enable organizations involved in social welfare to operate tax-free in the UAE.

Role of Liable Income in Tax Planning

The core strategy of tax planning for any business is identifying the nature of taxable income. Understanding which types of income are liable can enable businesses to make better tax-planning decisions while reducing the tax burden and maximizing financial performance.

Knowing your taxable income can be helpful in several ways:

• Maximize Deductions and Exemptions: If you know the income subject to tax,  organize your application for any possible deduction or exemption. This may assist in lowering the tax amount you need to pay.
• Reduce exposure to higher taxes: Income may also be taxed at different rates. By understanding its operations, a business can avoid paying high taxes on its earnings.
• Align financial strategies with tax regulations: Understanding taxable items can assist businesses in better coordinating their financial planning with the UAE's corporate tax regulations and taking advantage of the maximum tax benefits like deductions and credits.

Key Factors Affecting Liable Income and Corporate Tax Compliance in Dubai

• Corporate Tax De-Registration:

A company should deregister for corporate tax if the business stops operating or no longer has liable income. That would mean no tax will be collected on such income since no more income of this type will ever be generated. Failure to do so correctly might result in additional charges and penalties for the business.

• Corporate Tax Return Filing

Businesses are responsible for submitting returns stating their liable income for the year. This procedure assists in identifying the tax a company needs to pay according to its taxable earnings. Submitting these returns correctly guarantees that businesses fulfill their legal responsibilities and evade penalties.

• Corporate Tax Rates

The United Arab Emirates has strict rules. Companies are obligated to pay a 9% tax on every profit valued above AED 375,000. Businesses that earn less than this threshold are not liable to pay corporate tax. This system encourages small businesses, as they are exempt from tax liability on relatively lower profits.

• Corporate Tax for Free zones

Some types of income are excluded from corporate tax, indicating that companies are not responsible for taxation on earnings from these activities. For instance, revenue produced by governmental entities or particular activities in free zones might be free from taxation.

Common Challenges in Managing Corporate Tax Liable Incomes

1. Calculating taxable Income:

Determine taxable income, and some may be hard to distinguish between liable and exempted income, such as income from free zones with specific tax rates.

2. Compliance with Current Regulations: 

It is hard to keep track of all the changes in tax law and the registration and filing deadlines. Failure to do so will incur penalties; therefore, one must remain updated.

3. Common Reporting Mistakes

• incorrectly categorizing income as liable or exempt
• Failing to account for available deductions
• Failing to maintain proper records can result in inaccurate tax filings.

What is non-qualifying income?

Non-qualifying income is income subject to corporate tax under the UAE's tax laws. It does not benefit from exemptions and is taxed at the standard rate.

Here are some examples of non-qualifying income for which businesses might be required to pay corporate tax:

•  Income from Mainland Businesses

A business operating in the UAE mainland earns income from daily operations, that is, through sales or services. In such a case, would be classified as non-qualifying income and therefore eligible for corporate tax.

• Dividends of Non-Exempt Entities

In case your business receives dividends from companies that do not qualify, then those are nonqualifying and subject to the general corporate tax rate.

• Investment Income

Some investment incomes are not qualifying, like interest or dividends from firms not exempt from taxation. Such incomes will be taxed according to the corporate tax system.

Qualifying for 0% Tax in Free Zones

There is 0% corporate tax in free zones, but companies need to qualify as Qualifying Free Zone Persons (QFZP). To achieve this, their income must be classified as Qualifying Income under the UAE's corporate tax law.

• Free zone businesses with Qualifying Income pay 0% corporate tax.
• A company that does not meet the Qualifying Income criteria is taxed at 9% and loses its QFZP status.

What is Qualifying Income?

Qualifying Income is any income earned by a QFZP that qualifies for the 0% tax rate. This income must come from business activities or transactions that are considered qualifying within the specific free zone.

For more information visit UAE Corporate Tax Qualifying Income 

Criteria to Determine Qualifying Income

A few factors we determine if someone qualifies for certain income benefits in a free zone:

• If they make money from doing business with other folks in the free zone, except for certain types of activities that don't count.
• If they earn money from doing business with people outside the free zone, but only for activities that count.
• Any other money they make that meets certain small amount requirements.

We consider income as coming from transactions with someone in the free zone if that person actually benefits from the stuff or services being bought.

Now, Who Exactly Counts as Someone Who Benefits?

Beneficial recipients enjoy what is purchased without being obliged to pass it on to someone else.

In addition, we verify if the person in the free zone has a permanent business setup in the country. Then anyone from outside the country can be considered a member of the free zone.

Qualifying Income for Domestic or Foreign Permanent Establishment

Business operations in the free zone are subject to 9% corporate tax in Dubai. Qualifying Free Zone individuals' income is considered taxable income.

Income earned by a Qualifying Free Zone Person through a Domestic or Foreign Permanent Establishment will be treated as belonging to an independent entity related to the Qualifying Free Zone Person.

The Qualifying Income for Immovable Property Located in a Free Zone

Income derived from transactions involving immovable property located in a Free Zone is considered taxable income and is taxed as follows:

• Transactions with Non-Free Zone Persons involving Commercial Property.
• Immovable property transactions with any individual other than a commercial property owner.

The taxable income from these transactions for a specific tax period is the income payable to the immovable property calculated based on the relevant provisions of the Corporate Tax Law.

Conclusion

At Reyson Badger, we're the experts in tax consulting, especially when it comes to Corporate Tax Law. We'll keep you posted on all the latest changes regarding Corporate Tax in Free Zones. With our team of FTA Approved Corporate Tax consultants in the UAE, we provide a complete solution for Free Zones. We can help you ensure your income qualifies for 0% corporate tax in Dubai, as well as meet all the requirements.