UAE Corporate Tax and Freelancers: What You Need to Know

Introduction

The United Arab Emirates (UAE) is well-known for its business-friendly environment and low tax rates, making it an attractive destination for freelancers. However, recent changes in the tax landscape have raised questions about the tax implications for freelancers. In this article, we will break down UAE corporate tax rules in simple terms and explain how they apply to freelancers.

Understanding UAE Corporate Tax

Traditionally, the UAE did not impose corporate taxes on businesses, which made it a haven for entrepreneurs and freelancers. However, in recent years, the UAE has introduced new tax regulations to align with international standards.

Corporate tax is applicable to all business income, including freelancing: In the UAE, corporate tax is levied on the income generated by businesses, and freelancers, operating as businesses, are subject to corporate tax on their earnings. Whether your freelance business is structured as a sole proprietorship or any other legal form, corporate tax is applicable to the income it generates.

No Corporate Tax for Freelancers with Turnover up to AED 1 Million:

If you operate a business, including freelancing, and your annual turnover is up to AED 1 million, you are exempt from paying corporate tax in the UAE. This means you get to keep your earnings without worrying about corporate tax liabilities.

Freelancers Can Apply for Small Business Relief:

Freelancers, like other small businesses, can benefit from small business relief in the UAE. This relief allows freelancers with revenue up to AED 3 million per year to enjoy certain tax benefits.
 The AED 3 million revenue threshold applies to tax periods starting on or after 1 June 2023.
 This threshold will continue to apply to subsequent tax periods that end before or on 31 December 2026.

In practical terms, this means that if your freelance income falls below AED 3 million annually, you can apply for small business relief and potentially reduce your tax liability or even be exempt from corporate taxes.

To read more about small business relief please click the link: https://www.adzumglobal.com/blog/2/UAE/

If a freelancer is not claiming small business relief or the turnover exceeds AED 3 Million, they have to compute taxable income and pay applicable tax, lets see how taxable income is calculated and and what is the applicable tax rate.

What is the rate of Tax?

Corporate Tax shall be imposed on the Taxable Income at the following rates:
a) 0% (zero percent) on the portion of the Taxable Income not exceeding 375,000 AED.
b) 9% (nine percent) on Taxable Income that exceeds 375,000 AED.

What is Taxable Income and how to compute it?

In general, taxable income is determined by adjusting accounting profit (also known as net income) to account for certain items that are either taxable or non-taxable, as per the provisions of the tax law.

Accounting profit is the profit that is calculated by a company based on their financial statements such as income statement, balance sheet, and cash flow statement. Accounting profit is used by companies to assess their financial performance and to report their earnings to stakeholders such as shareholders, lenders, and creditors.

On the other hand, taxable profit is the profit that is used to determine the amount of tax that a company needs to pay to the government. Taxable profit is often different from accounting profit due to the various adjustments made to it for tax purposes. These adjustments can include adding back certain expenses that are not tax-deductible, deducting certain expenses that are tax-deductible, and accounting for any tax credits or deductions available under the tax law.

Can a freelancer deduct expenses to arrive at Taxable Income?

Expenses Deductibility for Freelancers: Freelancers in the UAE can indeed deduct certain expenses from their income to arrive at their taxable income.

Eligible Business Expenses: Deductible expenses for freelancers typically include costs that are directly related to their business activities. Common eligible expenses may encompass office rent, utilities, equipment purchases, software subscriptions, marketing and advertising expenses, professional fees, and even travel expenses incurred for business purposes.

Prudent Record-Keeping: To benefit from these deductions, freelancers must maintain meticulous records of their expenses. This includes retaining invoices, receipts, and other relevant documentation to support the legitimacy of the claimed expenses.

Accurate Tax Calculation: Deducting eligible business expenses from total income results in a lower taxable income. Therefore, freelancers who properly account for their expenses can reduce their tax liability, ultimately paying taxes only on their net business income.

Consultation with Tax Experts: Given the complexities of tax regulations, freelancers are encouraged to seek advice from tax experts or accountants who specialize in UAE tax laws. These professionals can offer guidance on what expenses can be deducted, ensuring compliance with tax regulations while optimizing tax efficiency.

Conclusion

In summary, the UAE's corporate tax rules are designed to be business-friendly, especially for small businesses and freelancers. If your business turnover is up to AED 1 million, you won't have to pay corporate tax. Freelancers with revenue up to AED 3 million per year can apply for small business relief, providing tax benefits.

It's essential for freelancers to stay informed about changes in tax laws and regulations in the UAE to ensure compliance. Consulting with a tax expert or legal advisor who specializes in UAE tax laws can help you navigate the evolving tax landscape and optimize your tax position as a freelancer in the UAE.

10 FAQs to understand taxation of freelancers better:

1. What is the corporate tax rate in the UAE for freelancers and businesses?
Corporate tax rates in the UAE vary based on taxable income, with 0% on income up to AED 375,000 and 9% on income exceeding that amount.

2. Who is subject to corporate tax in the UAE?
Corporate tax is applicable to all businesses in the UAE, including freelancers, as they are considered businesses.

3. Are there exemptions from corporate tax for freelancers in the UAE?
Yes, freelancers with an annual turnover of up to AED 1 million are exempt from paying corporate tax.

4. How does small business relief benefit freelancers in the UAE?
Freelancers with revenue up to AED 3 million per year can apply for small business relief, potentially reducing or exempting them from corporate taxes.

5. When does the AED 3 million revenue threshold for small business relief apply?
The AED 3 million revenue threshold applies to tax periods starting on or after 1 June 2023 and continues until tax periods ending on or before 31 December 2026.

6. How is taxable income calculated for freelancers in the UAE?
Taxable income is determined by adjusting accounting profit to account for certain taxable or non-taxable items as per the provisions of the tax law.

7. What are some examples of eligible business expenses that freelancers can deduct from their income for tax purposes?
Eligible business expenses may include office rent, utilities, equipment purchases, software subscriptions, marketing, professional fees, and travel expenses related to business activities.

8. Why is record-keeping important for freelancers regarding deductible expenses?
Meticulous record-keeping is crucial to support the legitimacy of claimed expenses and ensure compliance with tax regulations.

9. How can freelancers ensure an accurate tax calculation and reduce their tax liability?
Freelancers can reduce their tax liability by deducting eligible business expenses from their total income, resulting in a lower taxable income.

10. Is it advisable for freelancers to consult with tax experts or accountants regarding their tax obligations in the UAE?
- Yes, given the complexities of tax regulations, freelancers are encouraged to seek guidance from tax experts or accountants who specialize in UAE tax laws to ensure compliance and optimize tax efficiency.

Disclaimer: The information provided in this article is for general educational purposes and is not intended to serve as professional advice, whether financial, legal, tax-related, or any other field. Laws and regulations can change, and individual circumstances can vary widely. Relying solely on the information in this article for making important decisions is not recommended, and we disclaim any liability for actions taken without seeking appropriate professional consultation.