Learn how to calculate taxable income in Dubai under the UAE’s Corporate Tax law. Stay compliant—consult BSB Legal Consultants today!
When it comes to understanding tax laws in the UAE, things can get complicated fast. Moreover, Tax laws have been changed in the past year. Knowing how to calculate taxable income is important for businesses trying to stay compliant. Let’s break down the general rules for determining taxable income in Dubai in a way that’s easy for you.
Taxable income is the amount of income a business or individual must pay taxes on. Under UAE’s Corporate Tax law, your taxable income is essentially your accounting income for the tax period, adjusted according to specific rules laid out in the law.
According to Article 20 of the UAE’s Corporate Tax law, the taxable income of each person (or entity) must be determined separately. This process starts with preparing financial statements that follow the accounting standards accepted in the UAE. However, it doesn’t stop there—several adjustments need to be made to this accounting income to determine the actual taxable income.
Federal Decree by Law No. (47) of 2022 Concerning Corporate and Business Tax outlines specific adjustments that need to be made to your accounting income to calculate your taxable income. Let’s look at some of the most important ones :
If your business uses accrual accounting, you may need to adjust for unrealized gains or losses. These are profits or losses that haven’t yet been realized through a sale or other transaction. This adjustment ensures that only the actual, realized income is taxed.
Not all income is taxable. Some income may be exempt under certain conditions outlined in Chapter Seven of the law. If your income qualifies as exempt, it won’t be included in your taxable income.
Chapter Eight of the law specifies certain reliefs that may reduce your taxable income. For example, if your business qualifies for any specific tax reliefs, you can deduct these amounts from your taxable income.
Similar to exemptions and reliefs, deductions are specific expenses that can be subtracted from your taxable income. These could include certain business expenses like operational costs, depreciation, and more, as specified in Chapter Nine.
If your business deals with related parties—such as subsidiaries or associated companies—specific rules apply to ensure these transactions are at arm’s length. These rules can also impact your taxable income.
If your business has experienced a loss in previous tax periods, you may be able to carry forward those losses to reduce your taxable income in future periods. This is covered in Chapter Eleven of the law.
The Cabinet may issue resolutions that offer additional reliefs or incentives for certain qualifying business activities. These can further reduce your taxable income.
The law allows for other adjustments that the Minister may specify in the future. So, it’s essential to stay informed about any changes or additional rules that could affect your taxable income.
Most businesses in the UAE use the accrual basis for accounting, recording income and expenses as they earn or incur them, rather than when cash is exchanged. However, in some cases, businesses may choose cash-based accounting, where they record transactions only when they receive or pay money. This choice can significantly affect how they calculate taxable income.
In cases where there’s a conflict between the provisions of the Corporate Tax law and the accounting standards, the law takes precedence. This means that if your accounting practices differ from what the law requires, you must adjust your financial statements to comply with the tax rules.
By following the general rules and making the necessary adjustments, you can ensure that your business accurately calculates its taxable income in Dubai. For companies facing these complexities, seeking advice from a Dubai Lawyer or a top law firm in Dubai, such as BSB Legal Consultants, can provide invaluable assistance in ensuring compliance.
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