When the UAE introduced Corporate Tax from the financial year starting June 2023, many businesses started asking one key question:
👉 How do I know what part of my income is actually taxable?
The answer lies in understanding Taxable Income. It is not the same as your accounting profit. Instead, it is calculated by starting with your financial results and then making adjustments as required under the Corporate Tax Law.
In this blog, we will explain step by step how Taxable Income is determined in the UAE, what adjustments are made, what tax rates apply, and why professional accounting support is essential to get it right.
What is Taxable Income?
Taxable Income is the amount of profit that is subject to Corporate Tax under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022).
It is important because:
- It forms the basis for your Corporate Tax liability.
- It is different from your “net profit” shown in the financial statements.
- Errors in calculating it can lead to overpayment of tax or penalties from the Federal Tax Authority (FTA).
Step 1: Start with Accounting Income
The calculation begins with your Accounting Income – your net profit or loss as per your financial statements.
- Accounting Standards:
- Businesses must prepare accounts under IFRS (International Financial Reporting Standards).
- Small businesses with revenue ≤ AED 50 million may use IFRS for SMEs.
- Basis of Accounting:
- Most businesses must follow the Accrual Basis (recording income and expenses when earned/incurred).
- If your revenue is ≤ AED 3 million, you may use the Cash Basis (recording only when cash is received or paid).
👉 In simple terms: Your profit as per accounts is just the starting point.
Step 2: Make Adjustments
Once Accounting Income is identified, adjustments are made as per Article 20(2) of the Corporate Tax Law. These adjustments fall into different categories:
A. Exempt Income (Deducted)
Some income is exempt from Corporate Tax and must be removed from Accounting Income.
| Exempt Income Type | Explanation | Impact |
|---|---|---|
| Domestic Dividends | Dividends received from UAE companies (Resident Persons) | Deducted from Accounting Income |
| Participation Exemption | Income from shares if you own at least 5% and hold them for 12 months, and the company is taxed abroad at ≥9% | Deducted |
| Foreign Permanent Establishment (PE) | Profits from a foreign branch (if election is made and taxed abroad at ≥9%) | Deducted |
⚠️ Important: Expenses incurred to earn exempt income are not deductible. For example, if you spend money acquiring exempt dividends, those expenses are added back.
B. Non-Deductible Expenditure (Added Back)
Some expenses reduce your accounting profit but cannot be deducted for tax purposes. These must be added back.
| Expense Type | Rule under Corporate Tax |
|---|---|
| Capital Expenditure | Initial purchase of fixed assets is not deductible. Only depreciation/amortisation is deductible. |
| Mixed-Purpose Expenses | Only the business portion is deductible. Personal/other portion must be added back. |
| Entertainment | Only 50% deductible for client-related costs (meals, hospitality, etc.). Fully deductible for employees. |
| Fines & Penalties | Not deductible, except compensation for damages. |
| Donations & Gifts | Not deductible unless given to a Qualifying Public Benefit Entity. |
| Bribes/Illicit Payments | Always disallowed. |
| Interest Expenses | Subject to two limits: |
C. Unrealised Gains and Losses
- Normally, both realised and unrealised gains/losses are included.
- Businesses can elect to use the “realisation basis” (only tax when the gain/loss is realised).
- Once chosen, this election is generally irrevocable.
D. Related Party Transactions
Payments to shareholders, owners, or family members must follow the arm’s length principle (fair market value).
👉 Example: If you pay rent to a company owned by your relative, it must be at a fair market rate. Any excess is disallowed and added back.
E. Non-Residents
If you are a Non-Resident Person, you are only taxed on:
- Income linked to a Permanent Establishment (PE) in the UAE, or
- Income from UAE real estate or other “nexus”.
Step 3: Apply Tax Loss Relief
- If your business made a loss (negative Taxable Income), you can carry forward the loss.
- Losses can offset up to 75% of Taxable Income in future periods.
- Losses may also be transferred within a group (if conditions are met).
👉 Example:
If Taxable Income is AED 1,000,000 and you carry forward a loss of AED 600,000, only AED 750,000 can be offset (75%). You pay tax on AED 250,000.
Step 4: Apply Corporate Tax Rates
After all adjustments and reliefs, you arrive at the final Taxable Income. The Corporate Tax rates are:
| Taxable Income | Rate |
|---|---|
| Up to AED 375,000 | 0% |
| Above AED 375,000 | 9% |
For Free Zone Companies (QFZPs):
- 0% on qualifying income.
- 9% on non-qualifying income.
Withholding Tax:
- Currently 0% on cross-border payments (though law allows for future imposition).
Step 5: Understand the Tax Period
Another important aspect is the tax period:
- Juridical Persons (companies, LLCs, etc.)
- Tax period is normally the financial year adopted for accounting purposes.
- Must be at least 6 months and not more than 18 months (in case of new companies or change of year).
- Natural Persons (individuals doing business in UAE)
- Always use the calendar year (1 January – 31 December).
- First applicable tax period for individuals is from 1 January 2024.
👉 Example: If your company’s year runs from 1 July 2023 to 30 June 2024, your first tax period is that year.
Why This Matters for Businesses
Calculating Taxable Income is not just about looking at profit. It involves:
- Knowing what income is exempt.
- Identifying which expenses are not allowed.
- Applying loss reliefs and related party rules correctly.
- Understanding tax rates and periods for compliance.
Mistakes can lead to:
- Overpayment of tax.
- FTA penalties for underpayment.
- Missed exemptions or reliefs that could save your business money.
Final Thoughts
The UAE Corporate Tax Law has introduced a new layer of responsibility for businesses. While the tax rates are low compared to global standards, compliance is strict.
At Excellent Accountants, we help businesses:
- Prepare financial statements as per IFRS.
- Identify exempt income and non-deductible expenses.
- Apply Corporate Tax adjustments correctly.
- File accurate returns with the FTA.
👉 Contact us today to ensure your taxable income is calculated correctly and your business remains fully compliant.
