How to Calculate Gratuity in UAE: Your Ultimate Guide to End-of-Service Benefits
16/12/2025
YOUNG AND RIGHT ACCOUNTING & TAX CONSULTANCY
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The introduction of the federal corporate tax in the UAE has fundamentally reshaped the country’s financial, regulatory, and compliance landscape. For businesses, whether established on the mainland or operating in a free zone, understanding the meticulous process of calculating the corporate tax is no longer optional—it is a mandatory requirement. The new tax regime, governed by Federal Decree-Law No. 47 of 2022, is designed to align the UAE with global tax standards and anti-avoidance frameworks.
We simplify the complexities of this legislation. This comprehensive guide provides a step-by-step explanation of how taxable income is calculated and the corporate tax liability is determined in the UAE, incorporating the most relevant 2025 updates.
The UAE Corporate Income Tax (CIT) is a direct tax levied on the business profits of entities. The law came into effect for financial years beginning on or after 1 June 2023.
Financial statements are the foundation of corporate income tax calculation in the UAE. Every company, regardless of size or legal structure, must prepare its financial statements in accordance with International Financial Reporting Standards (IFRS). These statements include the Balance Sheet, Profit and Loss Statement, and Cash Flow Statement. The net profit appearing in the profit and loss statement becomes the starting point for identifying taxable income.
However, the corporate tax system does not rely solely on accounting profit. The net profit must undergo several adjustments to align with UAE tax rules. Accounting profit may include non-deductible expenses, exempt income, unrealised gains, or non-business transactions. On the other hand, taxable income must reflect only the profit that is legally subject to corporate tax as defined by UAE tax legislation. This is where tax adjustments play a vital role.
Companies must ensure that their accounting policies, depreciation methods, revenue recognition models, and expense classifications follow IFRS, and that supporting documents such as invoices, agreements, ledgers, vouchers, and schedules are maintained for at least seven years, as required by law. During an FTA audit, businesses must produce these records to validate their tax computations.
To calculate corporate income tax in the UAE, businesses must follow a structured and systematic approach:
Start with the accounting net profit from the Profit & Loss statement.
Apply tax-specific adjustments, which include adding non-deductible expenses and excluding exempt income.
Assess tax deductibility of various expenses.
Incorporate tax reliefs and incentives, where applicable.
Determine taxable income after adjustments.
Apply the appropriate corporate tax rate (0% for income up to AED 375,000 and 9% thereafter).
File the corporate tax return with the FTA within nine months from the end of the financial year.
Businesses must ensure that every step is supported by verifiable documentation, financial reports, and accurate accounting records.
Corporate tax is applicable to a wide range of persons, who are therefore burdened with tax obligations:
• UAE Resident Entities: Including mainland companies, partnerships, and free zone entities.
• Non-Resident Persons: If they have a Permanent Establishment (PE) in the UAE or earn UAE-sourced income.
• Natural Persons: If their annual business profits from licensed activities exceed AED 1 million.
• Large Multinational Enterprises (MNEs): Starting 2025, MNEs meeting the OECD Pillar Two revenue threshold (€750 million) may be subject to the Domestic Minimum Top-Up Tax (DMTT), ensuring an effective tax rate of 15% on their UAE income.
UAE Corporate Tax applies at a standard rate of 9% on taxable income, effective for financial years beginning on or after 1 June 2023. This tax is imposed under a federal regime and administered by the Federal Tax Authority (FTA). The law applies to all companies operating within the UAE, with special rules for free zone entities under the Qualifying Free Zone Person (QFZP) framework.
The purpose of the UAE corporate tax regime is to support global tax transparency while ensuring that businesses operating in the country contribute to economic development. It also strengthens the UAE’s position as a compliant and competitive international business hub. The law is supported by implementing regulations, public clarifications, cabinet decisions, and ministerial decisions issued by the Ministry of Finance (MoF) and enforced by the FTA.
Corporate tax applies to UAE-sourced income, worldwide income for resident companies, and specific categories of income earned by foreign entities operating in the UAE. Special rules oversee natural resource businesses, exempt entities, public benefit organisations, and non-resident persons.
Financial statements are fundamental to the tax computation process. The UAE Corporate Tax Law mandates that businesses prepare audited or, in some cases, unaudited IFRS-compliant financial statements. IFRS provides a globally accepted format for revenue recognition, expense classification, asset valuation, and depreciation.
To comply with corporate tax requirements, businesses must maintain proper accounting records, trial balances, ledgers, journal entries, supporting documents, and closing statements. These records must be retained for seven years from the end of the relevant tax period.
The FTA may require businesses to submit financial statements during an audit or compliance check. Businesses failing to maintain IFRS-aligned financial statements may face penalties or disallowances of certain tax positions.
Taxable Income is the crucial base upon which the corporate tax in UAE is calculated. It is not simply the accounting net profit, but a figure derived after making mandatory adjustments according to the Federal Decree-Law No. 47 of 2022. Every one of the businesses liable for corporate tax must learn how to calculate corporate income accurately for their first tax period and subsequent tax periods ending in the UAE.
The process for the calculation of corporate taxable income involves a systematic approach:
Start with Accounting Net Profit: The process begins with the net profit (or loss) reported in the financial statements, which must be prepared in accordance with the International Financial Reporting Standards (IFRS).
Add Back Non-Deductible Expenses: The accounting profit must be increased by adding back expenses that were deducted in the financial statements but are specifically deemed non-deductible for tax purposes. Examples include fines, penalties, personal expenditures, and a portion of certain entertainment costs.
Subtract Exempt Income: Income streams that are legally exempt from corporate tax must be removed from the accounting profit. The most common examples are dividends and capital gains from qualifying shareholdings and, under specific conditions, the income from foreign branches that is already subject to tax outside the UAE.
Apply Tax Adjustments and Reliefs: Other statutory adjustments include applying limitations on the deductibility of net interest expenses (generally limited to 30% of adjusted EBITDA) and recognizing tax loss relief. Businesses can carry forward tax losses to offset up to 75% of future taxable income. Free Zone entities must also segregate Qualifying Income to determine the portion subject to 0% tax.
Determine Final Taxable Income: The resulting figure, after all adjustments and reliefs, is the final Taxable Income for the applicable tax period. This figure is used to apply the corporate tax rate and determine the amount of tax due.
Corporate tax applies to a wide range of business entities in the UAE. These include mainland companies, partnerships, limited liability companies, free zone persons (both qualifying and non-qualifying), and foreign businesses generating income from the UAE.
A business is considered a UAE resident for corporate tax purposes if it is incorporated in the UAE or has its place of effective management within the UAE. Non-resident businesses may also fall under the corporate tax regime if they have a permanent establishment in the UAE or earn UAE-sourced income.
Regardless of the business structure, every taxpayer must register for corporate tax, maintain proper accounting records, file tax returns annually, and pay applicable tax liabilities. Even if a business qualifies for a 0% rate or an exemption, registration and filing obligations generally still apply.
The corporate tax calculation in the UAE is guided by the new corporate tax framework, where the UAE has introduced a federal corporate tax. To accurately calculate corporate tax in UAE, businesses must first determine their Taxable Income by adjusting their accounting profit for non-deductible expenses and exempt from corporate tax income. Once the Taxable Income is found, the standard corporate tax rate is applied: 0% on income up to AED 375,000, and 9% on the amount exceeding this threshold (uae is 9%). Every entity must comply with tax laws and, due to the complexity of the rules, seeking professional tax advice for this professional tax is highly recommended.
The new tax framework maintains incentives for business in the UAE Free Zones. A Free Zone Person (FZP) that meets all conditions is designated a Qualifying Free Zone Person (QFZP) and enjoys a 0% corporate tax rate on qualifying income.
• 0% Rate: Applied to Qualifying Income (typically derived from transactions with foreign entities or other FZPs).
• 9% Rate: Applied to Non-Qualifying Income (e.g., certain income from mainland transactions).
The Corporate Tax Law allows deductions for expenses that are wholly and exclusively incurred for business purposes. This includes staff salaries, utility costs, rent, business travel, depreciation, marketing expenses, and professional fees. However, the law also specifies non-deductible expenses such as fines, penalties, personal expenditures, and certain entertainment costs.
Understanding deductible and non-deductible expenses is central to computing accurate taxable income. Excessive deductions may lead to penalties for understating taxable income, while missed deductions may increase the tax burden unnecessarily. Businesses must ensure that all deductions are supported by legitimate evidence and documentation.
Certain types of income are exempt from UAE corporate tax. These include dividends from qualifying shareholdings, profits from foreign branches if the business elects for exemption, and capital gains arising from the disposal of qualifying shares. These exemptions encourage investment, international expansion, and capital mobility within the UAE economy.
Exempt income must still be recorded in the financial statements, but it is excluded from the taxable income calculation. Businesses must ensure that they meet eligibility requirements for each exemption and maintain adequate documentation to support these claims.
Corporate tax returns in the UAE must be filed annually within nine months from the end of the financial year. All filings are done through the FTA’s EmaraTax portal. The corporate tax return includes taxable income, all related adjustments, exempt income, relief claims, QFZP declarations, and supporting details.
Failure to meet filing deadlines may result in administrative penalties. Businesses must ensure that their financial statements are finalised on time, tax adjustments are computed accurately, and documentation is ready before filing. Young & Right assists in managing timely filings to prevent penalties and ensure full compliance.
The UAE Corporate Tax Law offers several reliefs and incentives to support business growth. Small Business Relief allows businesses with revenues of AED 3 million or less to be treated as having no taxable income until 2026. Other incentives include business restructuring relief, transfer relief, participation exemption, and free zone tax benefits.
Businesses must understand the eligibility criteria for each relief and maintain documentation to support claims. Incorrectly claimed relief may lead to tax assessments and penalties during FTA audits.
The FTA plays a crucial role in regulating corporate income tax. The authority issues guides, public clarifications, executive regulations, and cabinet decisions that shape tax compliance. It also manages registration, filing, payment, audits, and appeals.
Businesses must stay updated with FTA announcements, as regulations evolve regularly. Failure to comply with FTA guidelines can result in penalties, audit risk, and legal consequences. Young & Right supports businesses by ensuring that they remain fully aligned with FTA requirements.
At Young & Right, we specialise in helping UAE businesses understand how to calculate their corporate tax correctly, so you stay compliant and confident. For many owners, tax in the UAE involves more than just filing a return – it means interpreting new rules, linking them to your financial statements, and knowing exactly how corporate tax is calculated on your profits.
According to the UAE Ministry of Finance (according to the UAE ministry), the standard corporate tax framework applies a corporate tax rate of 9 on eligible profits. This tax rate in the UAE generally applies as a rate on taxable income above the specified threshold, while taxable income up to AED 375,000 is usually taxed at 0%. For most companies, corporate tax UAE is essentially a tax on business profits that is calculated at 9 once the threshold is crossed – in other words, tax is calculated at 9 on the relevant portion of your profit.
The UAE’s transition to a federal corporate tax system requires a professional approach to accounting, tax planning, and compliance. From calculating the adjusted taxable income to claiming tax loss relief and managing Free Zone compliance, every element must align with the UAE Ministry of Finance and FTA guidelines.
Young & Right Accounting & Tax Consultancy offers comprehensive advisory services, helping you to calculate your corporate tax accurately, meet your corporate tax obligations on time, and ensure full compliance, allowing you to focus on your core business in the UAE.
Let Young & Right’s corporate tax specialists handle your corporate income tax calculation, IFRS-aligned financial statements, and FTA-compliant return filing—so you can focus on running your business.
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