How is corporate tax calculated
How is corporate tax calculated?
First federal taxes will be levied on any legal person who participates in a business activity through which he makes annual cash profits, with all residents of the country exempt from income tax to prevent double taxation, we will explain in detail the taxable and non-taxable companies in the following paragraphs, but let's first address how corporate tax is calculated in general:
A 9% tax rate is levied on the annual net profit of companies if it exceeds AED 375,000.
A 9% tax is levied on the income of persons earned from self-employment or professional activities if it also exceeds the AED 375,000 barrier.
All companies engaged in the extraction of natural materials are subject to corporate tax determined by their respective emirate without the obligation for a fixed federal rate.
The multinational enterprise tax rate varies depending on some criteria such as business activities, volume of transactions and ownership of shares.
The federal tax is fixed in the seven emirates, but will the tax be calculated based on annual net income or corporate net accounting profit?
How to calculate tax on corporate profits?
The misunderstanding of how to calculate tax on corporate profits has caused widespread confusion among entrepreneurs, so the General Assembly explained how to calculate corporate taxes as follows:
Corporate taxes are calculated on the basis of net accounting income in accordance with the international accounting principles adopted in the UAE.
Accounting principles provide for the exclusion of corporate expenses from net income, which includes operating expenses, loan interest, amortization and depreciation expenses and others.
In the case of losses, the value of the tax due is based on the company's financial report, and the company is often exempt from taxes if the losses exceed 50% of the company's total capital.
This is about taxable companies in general, but will free zone companies be bound by this law, or will they still be subject to their free zone laws?
How to calculate the tax on companies in free zones:
To date, free zone companies enjoy a complete tax exemption for a period of 50 years, renewable depending on the company's activity and average profits, and once the company meets the tax compliance criteria, it is subject to the laws of its free zone to determine the required tax rate.
But according to the Authority's announcement, the new tax law will change the way the tax is calculated on companies in free zones starting in 2023, so how is the tax calculated on companies in the free zone?
Corporate tax will be applied to all categories of business according to the data contained in the company's financial report.
What are the new non-VAT companies?
In general we have collected for you the new corporate income tax exemptions or federal tax that will be applied by 2023 in the UAE:
Companies engaged in the extraction of natural resources will remain subject to special tax at the level of their respective emirates.
Multinational businesses that meet specific conditions in accordance with international agreements, a different tax rate that has not yet been determined will apply.
Income of individuals from working within the UAE, unless such income is from self-employment or from participation in business or other licensed economic activities.
Income of individuals from real estate investments, as long as these investments are within the limits of authorized personal ownership and are not a commercial activity carried out under a real estate investment license.
Capital dividends and dividends from personal investments in stocks and securities and interest earned from savings and deposit accounts.
Otherwise, all types of companies in the UAE and legal persons are subject to the new corporate tax if the annual net profit exceeds AED 375,000.
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