Guide to Corporate Tax Liable Income in Dubai

Written By Akshaya Ashok, Reviewed By Nouphal P C

Published on 17/01/2025

Dubai is a major business center in the UAE. In 2023, it introduced a corporate tax. This change is important for companies in the area. Now, businesses need to figure out what counts as Corporate Tax Liable Income. Knowing this is very important. It helps businesses follow the new tax rules. This way, they can avoid fines and work on plans to lower their tax bills. Understanding these tax details isn't just helpful; it's essential. It affects how well a business does and how it runs.

By getting a handle on corporate tax and liable income, companies can stay on top of their tax duties. This also helps them avoid trouble and find ways to grow their business and profits.

What are Corporate Tax Liable Income in Dubai?

Corporate Tax Liable Income

Corporate tax liable income in Dubai refer to the types of income that businesses must report and pay taxes on under the UAE's corporate tax regime. This includes all revenue generated from business activities that fall within the scope of taxation as defined by the UAE Corporate Tax Law. Essentially, if a business earns income from its operations, that income is generally subject to corporate tax unless specifically exempted.

Importance of Correctly Categorizing Income

Correctly categorizing income for tax purposes is crucial for several reasons:

• Compliance: Accurate classification ensures compliance with local tax laws, helping businesses avoid legal issues or penalties.
• Tax Liability Calculation: Different types of income may be subject to different tax rates or exemptions, impacting the overall tax liability.
• Financial Planning: Understanding taxable income helps businesses plan their finances effectively, ensuring they allocate sufficient resources for tax obligations.
  
  

Types of Corporate Tax Liable Income in Dubai

Dubai's corporate tax regime taxes various types of income businesses earn. This section outlines the different types of corporate tax liable income in Dubai.

• Revenue from Sales and Services

Income from the sale of goods and provision of services is taxable in Dubai. This includes:

• Sales revenue from retail, wholesale, and manufacturing businesses
• Service income from industries like technology, healthcare, and finance
• Revenue from construction, real estate, and hospitality businesses
  
  

Examples of taxable income from different industries:

• Retail: Sales revenue from stores, online platforms, and marketplaces
• Technology: Income from software development, IT services, and data analytics
• Manufacturing: Revenue from the production and sale of goods, including exports
  
  

• Investment Income

Taxable investment income in Dubai includes:

• Interest income from bank deposits, bonds, and other debt instruments
• Dividend income from shares in local and foreign companies
• Capital gains from the sale of assets, such as real estate, shares, and investments
  
  

Foreign and local investment income is treated similarly under Dubai's corporate tax regime. However, certain exemptions and deductions may apply to specific types of investment income.

• Royalties and Licensing Income

Taxable royalties and licensing income in Dubai include:

• Income from the licensing of intellectual property, such as patents, trademarks, and copyrights
• Royalties from the use of natural resources, like oil and gas
• Income from franchising agreements and technical services

These income streams are subject to corporate tax in Dubai because they represent a form of income earned by businesses from their intellectual property, resources, or expertise.

• Other Income

Additional income types that are taxable in Dubai include:

• Rental income from real estate properties
• Franchise fees from business partnerships
• Income from business partnerships, joint ventures, and collaborations
• Other miscellaneous income, such as income from the sale of assets or from insurance claims
  
  

Exempt Income in Dubai’s Corporate Tax Framework

Free Zone Income Exemptions

In Dubai, businesses operating within free zones can benefit from specific income exemptions under the corporate tax framework, particularly as Qualifying Free Zone Persons (QFZP). To qualify for a 0% corporate tax rate on their qualifying income, entities must meet certain conditions:

• Adequate Substance: The business must maintain sufficient operational presence in the free zone.
• Qualifying Income: Income must be derived from qualifying activities, which typically include:
  
  
  • Transactions with other free zone entities.
  • Engaging in specified activities like manufacturing, logistics, and financial services.
    
    
• Compliance with Regulations: Businesses must adhere to transfer pricing rules and maintain proper documentation.
• Audited Financial Statements: Companies are required to prepare audited financial statements in accordance with International Financial Reporting Standards (IFRS).
• De Minimis Threshold: Non-qualifying income must not exceed a de minimis threshold of 5% of total income or AED 5 million, whichever is lower.

Exemptions for Income Related to Government Projects and Non-Profit Organizations

Certain types of income are exempt from corporate tax under Dubai's corporate tax framework:

• Income from Government Projects: Income generated from contracts or projects directly related to government initiatives is typically exempt from corporate tax. This encourages businesses to engage in public sector projects without the burden of additional taxation.
• Non-Profit Organizations: Income earned by qualifying non-profit organizations that serve public interests may also be exempt from corporate tax. These entities must operate within the parameters defined by the UAE's regulations for public benefit organizations.
• Other Exempt Entities: Additional exemptions apply to government-controlled entities, extractive industries, and specific public benefit entities as outlined in the UAE Corporate Tax Law.
  
  

How to Calculate Corporate Tax Liable Income in Dubai?

Simple Step-by-Step Guide to Calculating Taxable Income

• Prepare Financial Statements: Maintain your financial records according to International Financial Reporting Standards (IFRS) to ensure consistency and transparency.
• Determine Net Profit: Review your financial statements to calculate the net profit, which is the total revenue minus all allowable business expenses incurred during the specified period.
• Identify Allowable Deductions: Subtract all allowable deductions from the net profit. Common deductions include:
  
  
  • Operating expenses (rent, utilities, salaries)
  • Depreciation on assets
  • Interest on business loans
    
    
• Adjust for Exempt Income: Identify any exempt income that should be excluded from taxable income, such as certain foreign income or income generated from government projects.
• Calculate Taxable Income: Use the formula: Taxable Income = Net Profit − Allowable Deductions − Exempt Income

• Apply Corporate Tax Rate: If the taxable income exceeds AED 375,000, apply the corporate tax rate of 9% to the amount above this threshold Corporate Tax = (Taxable Income − 375,000) × 9%

Tips for Optimizing Corporate Tax Liabilities

• Understand the Corporate Tax Framework: Familiarize yourself with the corporate tax laws in Dubai, including the 9% tax rate on taxable income exceeding AED 375,000. Knowing the specifics of what constitutes taxable income and allowable deductions is crucial for effective tax planning.
• Maximize Allowable Deductions: Identify and maximize all allowable deductions to reduce taxable income. Common deductible expenses include:
  
  
  • Operating Costs: Rent, utilities, salaries, and other operational expenses.
  • Depreciation: Deduct depreciation on capital assets like machinery and equipment.
  • Interest Expenses: Interest paid on business loans is generally deductible.
    
    
• Utilize Tax Incentives and Exemptions: Take advantage of various tax incentives offered in Dubai:
  
  
  • Free Zone Benefits: If your business operates in a free zone, ensure you meet the criteria to benefit from a 0% corporate tax rate on qualifying income.
  • Sector-Specific Incentives: Explore incentives available for specific sectors such as technology, manufacturing, and renewable energy.
    
    
• Consider Strategic Business Structuring: Evaluate your business structure to optimize tax liabilities:
  
  
  • Establish Entities in Free Zones: Consider setting up operations in free zones where possible to benefit from tax exemptions.
  • Form Tax Groups: If applicable, forming a tax group can simplify compliance and allow for the transfer of losses between group members.
    
    
• Leverage Double Taxation Treaties (DTTs): Utilize the UAE’s extensive network of double taxation treaties to avoid being taxed on the same income in multiple jurisdictions. This is particularly beneficial for businesses engaged in international trade or investment.
• Implement Effective Transfer Pricing Policies: Ensure compliance with transfer pricing regulations when conducting transactions with related parties. Proper documentation and adherence to international standards can prevent disputes and penalties.
• Conduct Regular Audits and Reviews: Regular internal audits can help identify potential areas for tax savings and ensure compliance with local regulations. This proactive approach allows businesses to adjust their strategies as needed.
• Engage Professional Tax Advisors: Collaborating with experienced tax consultants can provide valuable insights into optimizing your corporate tax position. They can help navigate complex regulations and identify additional tax-saving opportunities.
• Plan for Future Changes: Stay informed about potential changes to corporate tax laws and regulations in Dubai. Proactively adjusting your strategies in anticipation of regulatory shifts can safeguard your business against unexpected liabilities.
• Invest in Employee Incentive Programs: Consider implementing employee incentive schemes, such as stock options or profit-sharing plans, which can be structured to provide tax benefits while attracting and retaining talent.

The Role of Gross Income, Allowable Deductions, and Exemptions

• Gross Income: This is the total revenue from all business activities before any deductions. It serves as the starting point for calculating taxable income.
• Allowable Deductions: These are expenses that can be subtracted from gross income to determine net profit. They reduce the overall tax liability by lowering taxable income.
• Exemptions: Certain types of income may be exempt from taxation, which further reduces taxable income. Proper identification and exclusion of exempt income are essential for accurate tax calculations.

Corporate Tax Rates and How They Impact Liable Income

• Standard Rate: The corporate tax rate is set at 9% on taxable income exceeding AED 375,000.
• Zero Rate: Income up to AED 375,000 is taxed at 0%, providing a significant benefit for small businesses and startups.
• Higher Rate for Multinationals: A separate tax rate (to be determined) will apply to large multinational corporations that meet specific criteria.

Impact on Businesses in Different Sectors or Regions

Free Zones vs. Mainland Businesses:

• Free Zone Businesses: Many businesses operating in designated free zones can benefit from a 0% corporate tax rate on qualifying income if they meet specific conditions related to operational presence and compliance with regulations.
• Mainland Businesses: Companies operating in mainland Dubai are subject to the standard corporate tax rates outlined above.
  
  

Sector-Specific Impacts:

• Industries such as manufacturing, technology, and retail will be impacted by these rates based on their taxable income.
• Companies generating significant sales or service revenue may find their tax liabilities increase as they surpass the AED 375,000 threshold.

Compliance and Reporting

To maintain compliance with corporate tax laws in Dubai, businesses must adhere to specific reporting requirements. The Federal Tax Authority (FTA) mandates that taxable persons submit tax returns and pay taxes within the stipulated time frame.

Reporting Requirements:

• Tax Registration: Businesses must register for corporate tax with the FTA within the specified timeframe.
• Tax Returns: Taxable persons must submit tax returns electronically within 9 months from the end of the tax period.
• Tax Payments: Taxes must be paid within the same timeframe as the tax return submission.
• VAT Returns: Businesses registered for VAT must submit VAT returns electronically within 28 days from the end of the tax period.

Penalties for Non-Compliance:

• Late Registration: AED 10,000 to AED 50,000
• Late Tax Return Submission: AED 1,000 to AED 25,000
• Late Tax Payment: 1% to 4% of the unpaid tax amount per month
• VAT Non-Compliance: AED 1,000 to AED 50,000

Importance of Timely Tax Filings:

• Avoid Penalties: Timely tax filings help businesses avoid penalties and fines.
• Maintain Compliance: Adhering to reporting requirements ensures businesses remain compliant with corporate tax laws.
• Reduce Risks: Timely tax filings reduce the risk of audits, fines, and reputational damage.
• Optimize Tax Strategies: Accurate and timely tax filings enable businesses to optimize their tax strategies and minimize tax liabilities.

Conclusion

Businesses in Dubai need to understand corporate tax and how it affects their income. This guide will help them follow the rules and find ways to cut costs. The tax situation changes often, which can be tough to keep up with. That's why it’s a good idea to get help from trusted firms like Reyson Badger. We know the ins and outs of corporate tax in Dubai. With their advice, businesses can stay on track and compete better. By staying updated and taking action, companies can find chances to grow and succeed in Dubai’s lively market.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.