A Guide to Understanding Qualifying Income for UAE Corporate Tax

So, the UAE has finally introduced corporate tax, huh? As of June 1st, companies in the UAE now need to pay 9% tax on their profits. But don’t worry, the tax only applies to what the government calls “qualifying income.” What exactly does that mean? Well, my friend, you’ve come to the right place. This guide will walk you through everything you need to know about qualifying income and how it will impact your business. By the end, you’ll be a pro at calculating your company’s tax liability. The tax authority and Ministry of Finance have issued a whole set of rules for free zone companies, so we’ll break those down in simple terms. Ready to become a corporate tax expert? Let’s dive in!

Income From UAE Sources

If your company operates in the UAE, you need to understand what qualifies as taxable income. The tax authority considers several sources of income as “UAE-source,” meaning income generated from business activities within the UAE.

Any profits from goods sold or services provided in the UAE are considered UAE-source income. This includes income from rental properties, licensing fees, and interest earned in UAE bank accounts. Basically, if the activity or transaction that generated the income took place in the UAE, it will likely be considered UAE-source.

Income from investments in UAE securities, like stocks or bonds, also qualifies as UAE-source. The same goes for capital gains from selling UAE real estate or business assets. However, gains from selling shares of foreign companies, even if the sale was made in the UAE, are typically not considered UAE-source income.

If your company earns income from outside the UAE, those foreign-sourced profits are not subject to corporate tax in Dubai. But be prepared to provide documentation proving the income was genuinely earned abroad. The tax authority may scrutinize foreign-sourced income to ensure companies are not improperly allocating profits outside the UAE to avoid taxation.

In summary, most income from business activities, investments, property, and transactions within the UAE borders will be considered UAE-source and subject to the 9% corporate tax rate. But with proper record-keeping, foreign-sourced income can remain outside the scope of UAE taxation. The key is understanding what the tax authority qualifies as UAE-source income.

Income From Foreign Sources

If your company earns income from outside the UAE, you’ll need to determine if it qualifies as taxable income under the new regulations.

• Income from foreign investments like stocks, bonds, and real estate holdings are typically considered non-taxable in the UAE. Dividends, interest, and capital gains from foreign sources won’t be subject to UAE corporate tax.
• However, income from foreign branches, subsidiaries or permanent establishments may be considered taxable if the income is earned in a country that doesn’t have a double taxation agreement with the UAE. In this case, you may be able to claim foreign tax credits to avoid double taxation. Check with the FTA for specifics.
• Royalties, licensing fees, and other income earned from foreign sources for the use of assets in the UAE like intellectual property may also be subject to UAE corporate tax. The key factor is whether the income is connected to business activities in the UAE.
• If you have foreign customers or clients, the income from them would typically not be subject to Dubai corporate tax rate. However, if you have a permanent establishment in another country that serves those foreign customers, the income may be taxable. It ultimately comes down to the source of the income and specific double tax treaties.

In summary, most foreign income, investments and transactions are not subject to UAE corporate tax. However, income closely connected to UAE business activities or earned in countries without a double tax treaty may be taxable. Check with authorities to determine if your company’s foreign income qualifies before the compliance deadline. The last thing you want is an unexpected tax bill!

Capital Gains and Dividend Income

When determining your qualifying income for UAE corporate tax, capital gains and dividend income are two types of income you’ll need to consider.

Capital Gains

Capital gains refer to the profits from the sale of capital assets like property, equipment, investments, and securities. Under the UAE corporate tax law, capital gains earned within the UAE are considered taxable income. However, capital gains from the sale of shares or securities in UAE companies listed on UAE stock exchanges are exempt.

• To calculate your capital gains, take the selling price of the capital asset and subtract the purchase price. The difference is your capital gain.
• Keep records of the purchase and selling prices of all your capital assets to properly determine your capital gains.
• Capital losses can offset capital gains. So if you have any capital losses, be sure to deduct them from your capital gains.

Dividend Income

Dividend income includes any distributions of profits you receive from shares in UAE companies. Dividends paid by UAE companies to UAE corporate shareholders are not subject to corporate tax in Dubai.

• Dividends from foreign companies, however, are considered taxable income under UAE corporate tax.
• Keep records of any dividends received from foreign companies to report as part of your total taxable income.
• Like capital gains, dividend income is calculated based on what you receive, so keep records of all dividend payments.

Monitoring your capital gains and dividend income will help ensure you accurately calculate your qualifying income for UAE corporate tax. Be sure to keep good records and report all taxable income to avoid potential penalties from the FTA. Staying on top of the latest UAE tax laws regarding capital gains and dividends will help your business remain compliant.

Conclusion

So there you have it, a quick guide to understanding qualifying income under the new corporate tax in Dubai regulations. While the rules may seem complex, the key is focusing on whether the income was generated from UAE sources or abroad. Keep good records of transactions and costs to ensure you calculate your tax liability accurately. The FTA offers resources to help businesses comply, so don’t hesitate to use them. Though change can be difficult, this new tax regime shows the UAE’s commitment to building a sustainable economy for the future. With some adjustment, UAE businesses will adapt and continue thriving in this exciting new era of growth and progress in the Emirates.