Understanding Corporate Tax for Individuals in the UAE

In December 2023, the Federal Tax Authority in the UAE rolled out guidelines to shed light on how Corporate Tax (CT) is applicable to individuals. The aim is to make things clearer for people engaged in business activities within the country.

So, when does Corporate Tax come into play for natural persons? It kicks in if the total annual turnover from business activities in the UAE exceeds AED 1 million, regardless of physical residence, be it through citizenship or a residency visa.

Let’s dive into the tax rates. For taxable income under AED 375,000, the rate is 0%, meaning individuals won’t have to pay anything on the initial AED 375,000. However, once the income surpasses this threshold, a 9% tax rate is applied to the exceeding amount.

Certain income streams are exempt from Corporate Tax. Wages, personal investments, and real estate investments fall into this category.
Now, let’s break down the concept with an example. Consider a natural person in the UAE involved in various activities during a calendar year.

Firstly, they work under an employment contract for three months, earning a wage of AED 200,000. Next, they engage in freelance graphic design work, generating an income of AED 1,600,000 with deductible expenses amounting to AED 400,000. Lastly, they run a sole proprietorship selling phones, making AED 1,200,000 from local sales and AED 800,000 from overseas sales, while incurring deductible expenses of AED 1,400,000.

Let’s walk through the three steps of Corporate Tax calculation.

1. Calculation of Turnover:

The total turnover is computed by combining income from freelance work and the sole proprietorship. Wage income is not factored in.

Turnover = 1,600,000 + 1,200,000 + 800,000 = AED 3,600,000

2. Calculation of Taxable Income:

Taxable income is determined by subtracting expenses from the turnover.

Taxable Income = Turnover – Expenses = 3,600,000 – (400,000 + 1,400,000) = AED 1,800,000

3. Calculation of Corporate Tax:

For the portion of taxable income below AED 375,000, there’s a 0% tax rate. For the exceeding amount, a 9% rate is applied.

CT Payable = (1,800,000 – 375,000) × 9% = AED 128,250

Additionally, individuals have the option to opt for Small Business Relief if their revenue (turnover) doesn’t surpass AED 3 million.
Understanding the intricacies of Corporate Tax is crucial for individuals engaged in business activities in the UAE. By grasping the calculations and exemptions, they can navigate the tax landscape more effectively, ensuring compliance with the guidelines set by the Federal Tax Authority.