Corporate Tax in UAE: Taxable vs Non-Taxable Income Explained
A simple overview of the new regime
UAE corporate tax now applies to business income. The law sets clear rates and timelines. The aim supports growth with responsible rules. The framework follows global standards with local focus. Companies adapt plans to the new policy. Teams align systems with reports and audits.
Why classification of income matters
Finance teams separate taxable and non-taxable income. Clear mapping reduces errors during filing. Clean mapping also improves forecasts and cash plans. Leaders see risk early with better data. Auditors verify numbers with less friction. The business saves cost through discipline and order.
Headline rates and scope at a glance
The standard rate equals nine percent on profits above the threshold. Profits up to three hundred seventy five thousand dirhams are at zero percent. The rule supports small firms during early growth. Groups under Pillar Two may face top up rules. Mainland companies fall under normal scope. Free zone persons may get special treatment when rules allow.
Legal persons and natural persons under scope
Resident juridical persons are taxed on worldwide income with reliefs. Non-residents are taxed on UAE source income through a nexus. Natural persons register when turnover exceeds one million dirhams. Natural persons report only business income in scope. Wage income stays outside corporate tax. Personal investment income often sits outside scope too.
Core idea of taxable income
Taxable income starts from accounting income. Teams prepare financial statements under accepted standards. IFRS or IFRS for SMEs sets the base. The entity then applies tax adjustments. The team excludes exempt income and adds disallowed costs. The result forms the taxable figure for the period.
Adjustments that shape the tax base
Unrealized gains and losses can be adjusted by election in cases. Exempt income leaves the base through clear tags. Disallowed expenses return into the base by add back. Transfer pricing adjustments align related party prices. Reliefs for restructurings shift amounts when rules permit. Carried tax losses reduce the base within limits.
Costs that you can’t deduct
Law blocks non-business costs from the tax base. Fines and penalties also fail the test. Bribes and illegal payments are never deductible. Taxes that are recoverable cannot reduce income. Dividend distributions do not create deductions. Only half of eligible entertainment costs are deductible within caps.
What income is not taxable
The law shields several personal streams from corporate tax. Salaries paid to individuals stay outside the scope. Personal real estate income stays outside when not a licensed trade. Dividends and capital gains from personal shareholdings remain outside. Interest on personal deposits also stays outside the charge. The rule aims to keep private life separate from business life.
Mainland income vs free zone income
Mainland companies apply the standard method on net profit. Free zone persons may get zero percent on qualifying income. Income from dealings with the mainland can lose the zero rate. Income from excluded activities can also lose that rate. Free zone entities must keep substance within the zone. They must meet compliance to retain the status over time.
Interest deduction limits and leverage control
Net interest expense is deductible up to a fixed share of earnings. The cap links to earnings before interest, tax, depreciation, and amortization. Some standalone cases may get different relief. The aim curbs base erosion through excessive debt. Finance teams test the ratio during each close. Documentation supports the position during review.
Arm’s length rules for related parties
Deals with related parties must reflect market behavior. Teams apply the arm’s length principle to price terms. The authority can adjust amounts when prices deviate. Firms prepare a disclosure form and a local file. Some groups also keep a master file. Good files protect positions when questions arise.
Participation exemption for shares
Dividend income from qualifying holdings can be exempt. Capital gains on qualifying shares can be exempt as well. The entity must meet minimum ownership tests. The entity must meet a holding period test too. The subsidiary must face an adequate foreign tax rate. These tests prevent double taxation on the same value.
Foreign source income and double tax relief
Foreign source income may face tax abroad. UAE may grant a credit up to the local tax on that stream. A company may elect a foreign permanent establishment exemption. The exemption applies when the foreign branch pays adequate tax. Clear evidence is vital to support such reliefs. The goal avoids double tax while stopping abuse.
Treatment of branches in the UAE
Branches of foreign companies pay tax on UAE source income. Branches follow the same rates and deadlines. Some branches inside qualifying zones may get incentives. Branches must register and file returns on time. Branches keep local books that match head office records. Good alignment avoids mismatches and penalties.
How to compute taxable income step by step
The finance team starts from the trial balance. The team posts year end accruals with care. The team drafts statements under IFRS rules. The team identifies exempt income and removes it. The team identifies disallowed costs and adds back amounts. The team calculates the base and applies the rates.
Reporting flow on the portal
The entity creates or updates its profile on the portal. The entity confirms the taxable person details. The entity loads attachments for legal status and address. The entity confirms the financial year and currency. The entity submits the return after review and approval. The entity pays tax and saves the receipt in records.
Documentation that supports each figure
Keep copies of contracts and purchase orders by counterparty. Keep invoices and credit notes with cross references. Keep bank reconciliations and payroll registers by month. Keep lease files and utility bills for the address. Keep transfer pricing files for related party deals. Keep board approvals for key policies and elections.
Common errors and ways to avoid them
Teams sometimes misclassify income streams. Teams sometimes book private costs as business costs. Teams sometimes miss adjustments for unrealized items. Teams sometimes ignore interest caps during close. Teams sometimes submit returns after the deadline. A short checklist fixes most of these risks.
Controls that build reliable compliance
Set a monthly close day and stick to it. Set dual review on every journal over a set size. Set retention rules for core documents and evidence. Set access roles inside the finance system. Set a calendar for filing and payment events. Set a single owner for the final return.
Mainland vs free zone comparison in practice
Mainland firms apply the standard rate on taxable profit. Free zone persons may retain zero percent on qualifying streams. Deal mapping decides which streams keep that status. A free zone person should avoid non-qualifying mainland deals. A free zone person should monitor substance and staff levels. The person should track de minimis limits with care.
Elections that change timing and scope
A realization basis can defer some gains until actual sale. A foreign permanent establishment exemption can remove branch profit. A small business relief may apply under revenue caps. A tax grouping election may simplify returns for groups. Elections require careful analysis and written records. Elections must be applied consistently across years.
Natural persons and business activity
Individuals who run a business may enter the scope. The test looks at turnover within a calendar year. Once above the limit the person registers for tax. The person then files returns for business income only. Personal salary stays outside corporate tax always. Personal savings income also stays outside the scope.
Sector notes and practical angles
Real estate developers track revenue by project milestones. Retail chains track promotions and returns with clear tags. Service firms track work in progress and cutoffs. Contractors track variations and claims with evidence. Tech firms track intangibles and related party licenses. Each sector needs tailored controls for clean numbers.
Deadlines and the cost of delay
Returns are due nine months after year end. Payments follow the same nine month window. Late registration can trigger a fixed penalty. Late filing can trigger further administrative fines. Interest can accrue on unpaid tax amounts. Timely action preserves cash and reputation.
Role of technology in compliance
An ERP records transactions with proper masters. A document tool stores evidence with links to entries. A workflow tool tracks approvals and sign offs. A reporting tool builds schedules for the return. A dashboard shows deadlines and open tasks. Simple tools create strong results with low cost.
Training and internal awareness
Finance staff learn rules for taxable and exempt streams. Sales staff learn invoice terms that affect tax. Procurement staff learn document standards for vendors. HR staff learn payroll evidence needs and formats. Leaders learn cash timing for payments and returns. Shared learning keeps the system stable and ready.
The value of professional support
Rules evolve through decisions and clarifications over time. A professional team reads updates and reviews impact. A professional team tests models and confirms elections. A professional team reviews files before submission. A professional team answers queries from officials. Expert help saves time and reduces risk for management.
Practical checklist for year end readiness
Reconcile banks and receivables by cutoff date. Confirm revenue recognition for major contracts. Test interest cap and adjust finance costs. Review related party margins and files. Review loss utilization and relief claims. Lock folders and archive a final pack for audits.
Practical scenarios to classify income
A consulting firm earns fees from UAE clients. The firm records the fees as taxable income. The firm also earns interest on a refundable deposit. The interest links to business funds and enters the base. The owner receives a wage from a separate job. That wage stays outside corporate tax for the business.
A distribution company in a free zone sells goods to another free zone entity. The margin may count as qualifying income when rules are met. The same company sells to a mainland retailer. That sale can be non-qualifying income. The company tracks invoice flows with flags. Clear flags keep the return correct and defensible.
An investor sells a personal shareholding after a year. The gain sits outside corporate tax when not a business activity. A company sells a strategic stake in a subsidiary. The gain may qualify for participation exemption. The company tests ownership, period, and foreign tax level. The files support the exemption claim at review time.
Transfer pricing file essentials
The local file explains controlled transactions and methods. It shows benchmarks for margins and prices. The master file explains the group and value chain. It shows intangibles, funding, and functional splits. A disclosure form lists related parties and values. It confirms methods and documentation status. A calendar sets draft and sign-off dates.
Audit readiness across the year
Quarter one sets policies and trains staff. Quarter two reviews controls and sample files. Quarter three runs a dry close tests. Quarter four finalizes statements and tax packs. Each quarter leaves notes and action lists. This rhythm builds calm during audits.
Governance and ethics
Leaders set tone for honest reporting. Managers reward clean files and timely action. Staff escalate issues without fear. Vendors follow documentation rules in contracts. Customers accept fair terms at market rates. Good governance reduces tax risk and builds trust.
What can help your business — Mubarak Al Ketbi (MAK) Auditing
Your team can manage returns with effort and focus. Our team at Mubarak Al Ketbi (MAK) Auditing guides you through scope tests and filings. We review contracts and map income streams with care. We prepare computations and draft returns with notes. We train staff and set calendars for smooth work. We stand by you during reviews because a stitch in time saves nine.
Contact and visit details
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact / WhatsApp: +971 50 276 2132
