How to Calculate Tax Liability for Your Business
Tax liability is a crucial aspect of running a successful business, and understanding how to calculate it can save your company significant amounts of money. In the UAE, businesses are subject to corporate tax, which is implemented to ensure that companies contribute their fair share towards the country’s economy.
As a business owner in the UAE, it is essential for you to understand how to calculate tax liability, have a solid grasp of tax calculations to minimize your tax liability and maximize your profits.
By following our step-by-step approach, you’ll be able to determine your taxable income, identify potential exemptions, and ultimately calculate the exact amount owed to the authorities.
What is the Tax Liability of a Company?
Tax liability refers to the legal obligation of a business to pay taxes to the government. This tax is typically calculated based on the company’s taxable income, which is its gross income minus allowable deductions and expenses.
How it works:
- Businesses keep track of their income and expenses throughout the year.
- They calculate their taxable income by subtracting allowable expenses from their total income.
- They apply the relevant tax rate to their taxable income to determine their tax liability.
- Businesses then need to file tax returns and make tax payments to the government by the deadlines set.
Tax Liability of a Company in UAE
The UAE introduced a federal corporate tax system in June 2023. Here’s a simplified explanation:
- The standard corporate tax rate in the UAE is 9%.
- Businesses with annual taxable profits not exceeding AED 375,000 (around $100,000) are subject to a 0% tax rate.
- This tax applies to most businesses operating in the UAE mainland, excluding those in Free Zones with a qualifying corporate tax exemption.
- Businesses operating in certain free zones may have different tax regulations.
Taxable Income for UAE Corporate Tax
Taxable income in the UAE corporate tax system refers to the profit amount a business uses to calculate its tax liability. It’s essentially the net profit remaining after deducting allowable expenses from the gross income.
Gross Income
This includes all the revenue a business generates from its operations, such as sales, service fees, and interest earned.
Applicable Expenditures
These are the ordinary and necessary expenses a business incurs to generate its income. Examples include:
- Cost of goods sold (COGS)
- Salaries and wages
- Rent and utilities
- Marketing and advertising expenses
- Interest on business loans
Important Note: Not all expenditures are automatically considered “applicable.” The UAE Ministry of Finance has specific guidelines on what qualifies as an allowable deduction.
Allowable Deductions
These are specific expenses explicitly permitted by the tax law to be subtracted from the gross income. These typically go beyond general business expenses and might include:
- Depreciation on assets
- Bad debts
- Charitable contributions (with limitations)
Exempt Income (if applicable)
Certain types of income might be exempt from corporate tax under specific UAE regulations.
Tax Rates and Brackets:
The UAE corporate tax system has a single rate structure, not brackets. This means a flat rate of 9% is applied to the entire taxable income exceeding the threshold of AED 375,000. Businesses with taxable income below this threshold are subject to a 0% tax rate.
Businesses operating in certain Free Zones (QFZs) may have different tax rules. Qualifying Free Zone Persons (QFZPs) might benefit from a 0% tax rate on their qualifying income, subject to specific criteria set by the UAE Corporate Tax law.
The UAE tax regulations are still evolving. Businesses should stay updated on the latest information. Therefore, consult our tax professional at Shuraa Tax for specific guidance on calculating their taxable income.
How to Calculate Tax Liability? Example Calculation
“XYZ Company” operates in the UAE mainland with the following financials for the year:
Gross Revenue: AED 1,500,000
Cost of Goods Sold (COGS): AED 600,000
Operating Expenses (Salaries, Rent, etc.): AED 450,000
Step 1: Calculate Gross Profit
Gross Profit = Gross Revenue – COGS
Gross Profit = AED 1,500,000 – AED 600,000
Gross Profit = AED 900,000
Step 2: Subtract Allowable Operating Expenses (Assuming all expenses are allowable)
Taxable Income = Gross Profit – Operating Expenses
Taxable Income = AED 900,000 – AED 450,000
Taxable Income = AED 450,000
Step 3: Apply Tax Rate
Exceeds Threshold: The taxable income (AED 450,000) surpasses the threshold (AED 375,000). We need to calculate the tax liability on the amount exceeding the threshold.
Taxable income exceeding threshold: AED 450,000 – AED 375,000 = AED 75,000
Corporate Tax Liability: AED 75,000 (taxable income exceeding threshold) * 9% (tax rate) = AED 6,750
Therefore, based on this scenario, XYZ Company would have a corporate tax liability of AED 6,750 due to exceeding the tax threshold.
Small Business Relief for UAE Corporate Tax
Small Business Relief in UAE allows eligible businesses to be treated as if they haven’t generated any taxable income for specific tax periods. In simpler terms, it offers tax exemption within certain limits.
Who Qualifies for Small Business Relief (SBR)?
To claim SBR, your business must meet the following criteria:
- Be a resident person for UAE corporate tax purposes.
- Have a revenue of AED 3 million or less for the relevant tax period and all previous tax periods. This applies to tax periods ending before or on December 31, 2026.
- Not be a Qualifying Free Zone Person (operating in a Free Zone without a corporate tax exemption) or a member of a Multinational Enterprise Group (MNE Group).
If your business qualifies, you can elect for SBR by filing a notification with the Federal Tax Authority (FTA) within the tax return for the respective tax period.
How to Reduce Tax Liability for Your Business in UAE?
Here are some strategies you can consider to potentially reduce tax liability for your business in the UAE:
- The UAE’s corporate tax system is relatively new. It’s essential to stay informed about the latest regulations and updates issued by the Federal Tax Authority.
- Operating in a Free Zone with a valid corporate tax exemption can significantly reduce your tax liability.
- Proper bookkeeping practices ensure you have accurate records of income and expenses to support your tax filings and maximize allowable deductions.
- Understand which expenses are considered tax-deductible under UAE regulations. These typically include costs of goods sold, salaries, rent, utilities, and depreciation.
- Analyze your operating expenses and identify areas for potential cost reduction without compromising business operations.
- If your business meets the criteria (revenue under AED 3 million and other conditions), claim SBR to enjoy tax exemption on your profits.
And most importantly, a qualified tax professional like Shuraa Tax can provide personalized guidance on tax planning strategies to minimize your tax liability while ensuring compliance.
Simplify Your Tax Compliance with Shuraa Tax
Figuring out your tax liability of a company is important for keeping your business running smoothly and out of trouble with the law. If you make mistakes, it can cost you a lot of money in fines and you might miss out on tax savings. It’s essential to keep up with the latest tax rules and understand how they affect your business to avoid errors and get the most out of any tax liability.
At Shuraa Tax, we understand that dealing with taxes can be complicated. Our team of skilled accountants, auditors, and tax advisors in Dubai is here to help. We can look at your tax situation, make your bookkeeping easier, and take care of the filing process for you. By working with Shuraa Tax, you can lower your tax bill and have more time to focus on growing your business.
Contact Shuraa Tax today at +971508912062 or drop us an email at info@shuraatax.com.
