Procedure for computing taxable profits in the UAE
Starting a company in the United Arab Emirates is an easy process with the right guidance. However, to ensure the successful establishment of your business in the country, it is essential to meet the following conditions: Strict compliance with the laws and regulations of the UAE, an appropriate organization of the company’s resources, and good administration of corporate and individual tax. For this reason, in the following lines, we will talk about the taxable profits in the UAE.
In this article, you will learn about the aspects of taxable profits in the UAE, the process to calculate them, how to compute them and how we can help you with this process.
- What are taxable profits in the UAE?
- Aspects of taxable profits in the UAE
- Types of taxable profits
- How to calculate your individual taxable profits?
- The process to calculate your corporate tax
- The process to compute taxable profits in the United Arab Emirates?
- Taxable profits VS non-taxable profits
- The UAE taxation system
- How can we help you compute your taxable profits in the UAE?
1. What are taxable profits in the UAE?
Taxable profits are the part of your gross income that you use to calculate how much tax you owe in a given tax year. It can be described as adjusted gross income (AGI) minus standard deductions or allowable itemized. The taxable profits include bonuses, salaries, wages, and tips, as well as investment income and various types of unearned income.
2. Aspects of taxable profits in the UAE
Taxable profits consist of both unearned and earned income. The unearned profits that are considered taxable include government benefits (such as disability payments and unemployment benefits), canceled debts, lottery payments, and strike benefits. The taxable profits include the earnings generated from dividends, interest income, and appreciated assets that were sold during the year.
When it comes to deductions, the authorities offer individual tax filers the option to claim a list of itemized deductions or the standard deduction. Itemized deductions include interest paid on medical exceeding a specific threshold, mortgages, and a range of other expenses.
Generally, when businesses file their taxes, they do not report their revenue directly as taxable profits. Rather, they subtract their business expenses from their revenue to calculate their business profits. Then, they subtract deductions to calculate their taxable profits.
Important to realize: Marginal tax rates and tax brackets are based on taxable income, not gross income.
3. Types of taxable profits
Every person who pays taxes knows that the failure to file a report for one’s income tax can have serious consequences. So, to be sure about paying taxes, here we show you some types:
3.1 Employee compensation and benefits
This is the most common type of taxable income and includes wages and salaries, as well as fringe benefits.
3.2 Investment and business income
For self-employed individuals, they are also subject to tax liability, specifically through their business income. For example, partnership income and net rental income qualify as taxable income.
3.3 Miscellaneous taxable income
This type includes incomes that do not fit into the other types. Includes things such as death benefits, canceled debts, and life insurance. Alimony, items involved in barter trading, and income for one’s hobby are also miscellaneous taxable income
3.4 Assignment of income
This is the income that an agent recieve for you. If you agree by contract that an external party receives the income for you, you must include the amount in your income when the party receives it.
For example, if you and your employer come to the agreement that he has to pay a portion of your salary to your former spouse, you have to include the amount in your income when your former spouse gets it.
3.5 Constructively-received income
In this type, you are generally taxed on income that is available to you, regardless of whether you have it or not. A valid check that was available to you before the end of the tax year is an income you constructively receive in that year, even if you do not deposit it in your account or you do not cash the check until the next year.
For example, if the postal service tries to deliver a check to you on the last day of the tax year and you are not home to receive it, you must include the amount in your income for the tax year.
3.6 Prepaid income
Some prepaid incomes, such as compensation for future services, are included in your income in the year you receive them. However, if you use an accrual method of accounting you can defer the prepaid income before the end of the next tax year. In this situation, you must include the payment in your income as you earned it by performing the services.
4. How to calculate your individual taxable profits?
The steps to calculate your taxable profits in the UAE are the following:
4.1 Determine your filing status
To calculate your taxable profits for an individual tax return, the first thing you need to do is determine your filing status. If you do not have a spouse, you can file your taxes as a head of household (HOH) (if you have a qualifying person for whom you pay more than half of the support and housing cost) or you can fill it as a single filer.
In the case you have a spouse, you can file your taxes as married filing jointly. However, there are some instances when it makes sense to file as married filing separately.
4.2 Gather documents for all sources of income
Once you know your filing status, the next step will be to gather documents for all sources of income for yourself, your spouse (if applicable), and any dependents (if applicable). The result of all these sources of income goes by the name “gross income”
4.3 Calculate your adjusted gross income (AGI)
The next step is to calculate your AGI. Your AGI is the result of taking certain “extra attributions” to your gross income, such as loan interest, contributions to a qualifying individual retirement account, and certain education expenses.
We consider these items as “extra attributions” because they reduce your income before taking any allowable itemized deductions or standard deductions.
4.4 Calculate your deductions (itemized or standard)
After calculating your deductions, as mentioned above, you can either take the itemized deductions or the standard deduction. The standard deduction is an amount that tax filers can claim if they do not have enough itemized deductions to claim.
4.5 Calculate taxable income
The last step is to calculate your taxable income, you will need to take AGI, calculated above, and subtract all applicable deductions.
5. The process to calculate your corporate tax
The corporate tax is a form of direct tax levied on the net profit of corporations and other business entities. You can also find it as the “Business Profits Tax” or “Corporate Income Tax”. All companies whose taxable profit is greater than AED 375,000 fall under the purview of corporate tax and must pay a certain percentage of the net profit. In order to extend support to small businesses and start-ups, the corporate tax will be 0% if the net profit is up to AED 375,000.
This tax is 9% of the net profit in the company’s financial statements. For example, if the net profit is 200,000 AED, the corporate tax will be 18,000 AED (200.00×9/100).
6. The process to compute taxable profits in the United Arab Emirates
There are two approaches to calculating taxable profits, the direct method, and the indirect method. Under the direct method for calculating taxable profits, you can calculate taxable profits directly by deducting the tax allowable, the cost of goods sold, and other allowable deductions from the gross income of the corporations. In other words:
“Taxable profits = gross income – cost of goods sold – Tax allowable expenses and deductions + other taxable income”.
This is the most straightforward method of calculating taxable profits and would be even more effective if companies do not prepare their financials regularly. In the indirect method, you can calculate the taxable profit by making accounting profits as a base, adding back all disallowable expenses, deducting tax allowable expenses, adding other taxable income, and deducting non-taxable other income.
Generally, the tax authorities and companies prefer to use the indirect method to calculate taxable income. This is a reliable and very effective method to compute the corporate tax where businesses are preparing the financials regularly, and these financial statements are audited by external auditors. In addition to this, it is an easy way to calculate taxable profits as accounting profits are taken from the audited financials. And the count of any other numbers are available in the financial statements.
In both methods, the tax allowed incomes and expenses are based on the principles and rules defined in the corporate tax law and related regulations
7. Taxable profits VS non-taxable profits
Generally, the authorities consider almost any type of income taxable, but a small number of income streams are not taxable. For example, if you are a member of a religious organization who has taken a vow of poverty or work for an organization run by that order, and turns your earnings over to the other, then your income is not taxable.
Similarly, if you receive an employee achievement award, its value is not taxable as long as you meet certain requirements. If someone dies and you receive a life insurance payment, then that is a Non-taxable income as well.
Certain tax agencies define non-taxable and taxable income differently. For example, in the United States, lottery winnings are taxable. However, in Canada, lottery winnings and other unexpected one-time windfalls are non-taxable.
7.1 What is a non-taxable profit?
A non-taxable profit refers to the income received but it is not subject to taxation. However, even if these forms of compensation cannot be taxed, they still need to be reflected in the tax return.
Some examples of unearned profit are the following:
- Interest
- Capital gains
- Inheritance
- Meals and lodging
- Child support payment
- Gifts
- Cash rebates from items bought
- Welfare benefits
Other forms of unearned income can derive from loans that have been forgiven, winning from casinos or lotteries, and government benefits (like unemployment benefits or disability).
8. The UAE taxation system
The United Arab Emirates does not levy an individual income tax. However, it levies a corporate tax on foreign banks and oil companies. Excise tax is levied on items that are harmful to the environment or human health. Another type of tax is the Value Added Tax (VAT) and this is levied on a majority of services and goods.
9. How can we help you compute your taxable profits in the UAE?
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