Corporate Income Tax UAE: What Small Businesses Need to Know

Corporate Income Tax UAE Summary for Small businesses

The following article provides a high-level overview of some of the most important provisions of the Corporate Income Tax UAE laws for small businesses. It is primarily based on:

  • Corporate Tax – General Guide (CTGGCT1) issued in September 2023 by the Federal Tax Authority
  • Accounting Standards and Interaction with Corporate Tax (CTGACS1)

The latest version of the above guides can be downloaded from the Federal Tax Authority – Corporate Tax website.

Corporate Income Tax UAE – Tax Rates

The Computation of Corporate Income Tax Liability is a 2-step process:

  • The Taxable Person must first determine their Accounting Income. This will be based on Financial Statements prepared according to accounting standards recognized in the UAE (IFRS or IFRS for SMEs).
  • The second step is to apply the relevant adjustments to the Accounting Income to arrive at the Taxable Income amount.

Taxable income is taxed at the following tax rates:

  • Not exceeding AED 375,000 is taxed at 0%;
  • Amounts above AED 375,000 are taxed at 9%.

Deadline

Taxable Persons must submit a Tax Return to the FTA within 9 months after the end of each Tax Period.

Format

The accrual basis of accounting is required once a Taxable Person’s Revenue exceeds AED 3,000,000 in the Tax Period. Under the Accrual Basis of Accounting, Revenue and expenditure are recognized when they are earned or incurred, not necessarily when payments are received or made, or invoices received or sent.

Taxable Persons must prepare Financial Statements in compliance with IFRS. However, if your revenues do not exceed AED 50,000,000. The Taxable Persons may apply IFRS for SMEs framework.

Record keeping

Taxable Persons need to maintain records and documentation that:

  • support the information provided in a Tax Return or in any other document to be submitted to the Federal Tax Authority (FTA);
  • enable the Taxable Person’s Taxable Income to be readily ascertained by the FTA.

For example, a non-exhaustive list of all the documentation that you need to maintain:

  • A record of the Taxable Person’s transactions in the Tax Period;
  • A record of the Taxable Person’s assets, including details of any purchases or disposals;
  • A record of the Taxable Person’s liabilities;
  • A record of any stock held at the end of the Tax Period;
  • Bank statements;
  • Loan or financing documentation;
  • Sale and purchase ledgers;
  • Invoices;
  • Order records and delivery notes;
  • Other relevant business correspondence.

For example, you can scan and store paper receipts electronically. This is where Xero/ApprovalMax/Dext provide tremendous value because they help in establishing proper audit trails and store the source documentation. However, the key is that supporting documents get submitted by individuals at all levels inside of the organization. This can be achieved by cultivating a company culture that attaches great importance to the collection of supporting documentation.

Non-compliance with keeping of records requirements will result in one of the following penalties:

  • AED 10,000 for each violation; or
  • AED 20,000 in each case of repeated violation within 24 months from the date of the last violation.

Taxable Persons must keep records and documents for 7 years following the end of the Tax Period to which they relate.

Audited Financial Statements

From a Corporate Income Tax perspective, the taxable person is exempt from having their financial statements audited if their revenues are below AED 50,000,000. However, there are other laws and regulations that still might require you to maintain audited financial statements.

Deductibility of expenses

The general rule is that expenditure must be incurred wholly and exclusively for the purposes of the Taxable Person’s Business. If expenditure is incurred partly for Business purposes and partly for some other purposes, the amount must be apportioned. The apportionment needs to be fair and reasonable. For example, if someone needs to travel for business somewhere but combines it with personal holiday, the hotel expense needs to be apportioned.

Capital expenditure

Capital expenditure, for example the purchase of a computer which has a useful life of several years, is not tax deductible. However, the cost of capital assets is spread across multiple tax periods (which is also known as depreciation). In contrast, the depreciation charges are tax deductible.

Interest expenses

Interest expenditure can be tax deductible. However, the deductibility is capped as the difference between (1) the amount of Interest expenditure incurred and (2) Interest income derived during a Tax Period.

General Interest Deduction Limitation Rule

If Net Interest Expenditure exceeds AED 12,000,000, the amount deductible Net Interest Expenditure is the greater of 30% of EBITDA and the de minimis threshold of AED 12,000,000.

  • Above the threshold, Net Interest Expenditure would be disallowed in Tax Period and carried forward to the subsequent Tax Periods.
  • Below the threshold, the full amount of Interest expenses can be deducted.

Specific Interest deduction limitation

No deduction is allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:

  • A dividend or profit distribution to a Related Party;
  • A redemption, repurchase, reduction or return of share capital to a Related Party;
  • A capital contribution to a Related Party;
  • The acquisition of an ownership Interest in a Business that is, or becomes, a Related Party following the acquisition.

However, the exemption does NOT apply if the main purpose of obtaining the loan and carrying out the transaction is NOT to gain a Corporate Income Tax advantage.

Entertainment expenditure

Entertainment expenses often contain a private element that would prevent the expenditure from being wholly and exclusively incurred for Business purposes. That’s why for Corporate Income Tax purposes only 50% of the expenses is eligible for deduction.

The deductibility limitation does not apply to expenditure incurred for staff entertainment. This means that, for example, the cost of internal entertainment such as staff parties can be fully deducted unless the staff are family members, or the event is private in nature (such as a wedding).

Non-deductible expenses

The Corporate Income Tax UAE Laws list some expenses that are non-deductible, such as:

  • Expenditure not incurred for the purposes of the Taxable Person’s Business;
  • A donation, grant or gift;
  • Any fines and penalties;
  • Recoverable input VAT.

Transactions between Related Parties and Connected Persons need to comply with transfer pricing rules

Related Parties must apply the “arm’s length principle” when entering a transaction or arrangement with each other. This means that the price of a transaction between Related Parties should be the same as if the transaction had taken place between two unrelated independent parties.

Broadly, a Related Party is an individual or juridical person that has a pre-existing relationship with another Person through ownership, control or kinship (in the case of individuals – parents and children, grandparents, grandchildren, siblings, great-grandparents, great grandchildren, uncles, aunts, nieces and nephews, etc.).

A natural person and a juridical person: The natural person, or one or more Related Parties of the individual, are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in the juridical person.

Transfer pricing rules aim to ensure that the price of a transaction is not influenced by the relationship between the parties involved. To achieve this and to avoid artificially profit shifting, the internationally recognized arm’s length principle is used for transactions between Related Parties and Connected Persons. The transfer pricing rules apply to both cross-border and domestic transactions carried out by legal entities and individuals.

The FTA can require a Taxable Person to disclose information regarding their transactions and arrangements with their Related Parties and Connected Persons, together with their Tax Return.

Small Business Relief

The Corporate Income Tax UAE law allows a Taxable Person to elect for Small Business Relief if their revenues do not exceed AED 3 million. This implies that the Taxable Person is treated as having no Taxable Income or a tax rate of 0%. The AED 3 million threshold is determined based on IFRS/IFRS for SMEs.

Tax Groups

There is also a possibility of creating a Tax Group between different entities. Tax Groups have the following advantages and disadvantages:

  • The chief benefit is that you only need to submit a single return.
  • However, the disadvantage is that a blocking issue that prevents filing of the tax return will result in both entities being in non-compliance.
  • You can only have an exemption of AED 375,000 for the Tax Group instead of having an exemption of AED 375,000 for each entity of the Tax Group.
  • Transactions between members of the Tax Group should be determined consistent with the arm’s length principle.