How to Calculate Taxable Income in UAE
Introduction
The introduction of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) has made it essential for businesses to understand how to calculate their taxable income. While accounting profit is the starting point, various adjustments, exemptions, and reliefs must be applied before arriving at the final taxable income figure.
This article provides a step-by-step guide to calculating taxable income for UAE entities in compliance with the Federal Tax Authority (FTA) rules.
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Step 1: Start with Net Accounting Profit
• Businesses must prepare their financial statements in line with International Financial Reporting Standards (IFRS).
• The net profit before tax reported in financial statements is the starting point for tax computation.
Example:
Net Accounting Profit (before tax): AED 2,000,000
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Step 2: Add Back Non-Deductible Expenses
Certain expenses are not deductible for corporate tax purposes and must be added back:
• Fines and Penalties – AED 25,000
• Donations to non-approved charities – AED 15,000
• 50% of entertainment expenses – AED 20,000
Total Add-Backs = AED 60,000
Adjusted Profit Subtotal = AED 2,060,000
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Step 3: Deduct Exempt Income
Some income streams are exempt from tax and should be deducted:
• Dividends from UAE resident companies – AED 200,000
• Capital gains on sale of qualifying shares – AED 150,000
Total Deductions = AED 350,000
Adjusted Taxable Income = AED 1,710,000
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Step 4: Consider Reliefs and Adjustments
1. Tax Loss Relief
o Tax losses from prior years may be carried forward indefinitely.
o Losses can offset up to 75% of taxable income in any given year.
o Example: Prior year tax loss = AED 300,000.
o Deductible Loss = AED 300,000 (≤ 75% of 1,710,000 = AED 1,282,500).
Revised Taxable Income = AED 1,410,000
2. Group Relief
o Applicable if part of a group with ≥75% ownership.
o Losses may be offset across entities.
3. Exemptions for Foreign Permanent Establishments
o Income attributable to foreign branches may be exempt (subject to conditions).
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Step 5: Apply Corporate Tax Rates
• 0% on first AED 375,000 = AED 0
• 9% on remaining AED 1,035,000 = AED 93,150
Final Corporate Tax Payable = AED 93,150
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Key Considerations in Calculating Taxable Income
1. Deductible vs. Non-Deductible Expenses
o Deductible: Staff salaries, rent, utilities, cost of sales, approved donations.
o Non-Deductible: Fines, bribes, non-business expenses.
2. Transfer Pricing (TP) Adjustments
o Related-party transactions must comply with the arm’s length principle.
o Benchmarking may be required to support pricing.
3. Free Zone Entities
o Qualifying Free Zone Persons (QFZPs) may pay 0% tax on qualifying income but must meet strict conditions on substance and reporting.
4. Record-Keeping
o Businesses must maintain tax records for at least 7 years for FTA inspection.
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Conclusion
Calculating taxable income in the UAE involves more than just looking at accounting profit. Companies must adjust for non-deductible expenses, exempt income, tax losses, and reliefs to arrive at the correct taxable base.
As seen in the example, an accounting profit of AED 2 million can lead to a taxable income of AED 1.41 million and a tax liability of AED 93,150 after applying adjustments and exemptions.
Proper planning, compliance with IFRS, and robust documentation are essential to ensure accuracy and avoid penalties.
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✍️ Prepared by Sheikh Anwar Accounting and Auditing LLC – Registered Auditor with the Ministry of Economy (Auditor Entry No. 5817, Company Entry No. LC4695-01). We specialize in Corporate Tax, Transfer Pricing, VAT, and AML Compliance, helping UAE businesses calculate and optimize taxable income accurately.
📧 Contact us: info@sa-auditors.com
🌐 Visit us: www.sa-auditors.com
