Below the AED 375,000 Threshold: Craft Studio Tax Computation (UAE)

Dune Craft Studio LLC is a small Sharjah business selling handmade homeware online and at weekend markets. For its first full tax period it reported revenue of AED 1,100,000, costs of AED 780,000 and an accounting profit of AED 320,000, with no fines, entertainment or other adjusting items.

With taxable income of AED 320,000, the whole amount sits inside the 0% band. The computation is short, but it still has to be done and filed: the threshold is claimed on the return, not granted automatically.

The example shows the full working, ending in a tax bill of AED 0.

No adjustments arise: there are no fines, no disallowed donations, no entertainment and no exempt income in the accounts, so accounting profit of AED 320,000 converts directly into taxable income of AED 320,000.

Because AED 320,000 does not exceed the AED 375,000 threshold, the 0% rate in Article 3 applies to the entire amount and no 9% computation is needed.

For the complete rulebook behind these adjustments, see our guide to taxable income.

Each step below carries its own arithmetic, so the full trail from the starting figure to the tax payable is visible.

Article 20(1) of Federal Decree-Law No. 47 of 2022 defines taxable income as the accounting profit shown in adequate standalone financial statements, adjusted as the law requires. The financial statements, usually prepared under IFRS, are the foundation of every computation, which is why clean books are a tax asset in themselves.

The adjustments run in two directions. Some amounts are added back because the law denies or restricts the deduction: fines and penalties under Article 33, donations to non-qualifying entities under Article 33, half of entertainment expenditure under Article 32, general provisions that are not yet incurred under Article 28, and anything above arm's length with related parties under Article 34. Other amounts are removed because the law exempts them: dividends and qualifying foreign income under Articles 22 to 24.

The reliable method is to walk the profit and loss account line by line and test every expense against Articles 28 to 33 and every income line against Articles 22 to 24. Adjustments found anywhere else in the return, such as loss relief or the interest limitation, are applied to the resulting taxable income, not to the accounting profit.

Only when every adjustment is processed does the AED 375,000 threshold enter the picture. Applying the rates to accounting profit before adjusting is the single most common arithmetic error in first-year returns, and it always produces the wrong tax.

A subtle point is that some adjustments are permanent and some are timing. Fines added back under Article 33 never come back; the deduction is gone forever. A general provision added back this year will be deducted when the cost crystallises. Knowing which kind each adjustment is tells you whether this year's tax is permanently higher or just earlier.

Finally, remember that the interest limitation, loss relief and group relief all operate on taxable income after these line-by-line adjustments. A company that perfects its Article 28 to 34 adjustments but ignores Article 30 can still file a wrong return, because the computation has layers and each layer must be completed in order.

The background rules are set out in our guide to deductible expenses.

The most expensive mistake is netting adjustments incorrectly: adding back the full entertainment bill instead of half, or forgetting that breach-of-contract compensation stays deductible while fines do not. Each adjustment has its own article and its own percentage, and they cannot be blended.

The second is timing: provisions, prepayments and unrealised items belong to the period in which they are incurred or realised, not the period in which they are booked as estimates. A general provision added back this year becomes deductible when the cost actually crystallises.

The third is skipping the computation because the answer looks obvious. Even a below-threshold company must run the full working on its return; the threshold is claimed through the computation, not assumed.

A fourth mistake is misclassifying breach-of-contract compensation as a fine. Genuine commercial compensation for damages stays deductible under the Article 33 carve-out, and lumping it with penalties overstates taxable income just as surely as missing an add-back understates it.

Our guide to exempt income covers the underlying provisions in more depth.

On the corporate tax return, accounting profit is the starting figure and each adjustment is disclosed in the reconciliation schedule: the AED 8,000 fines add-back cites Article 33, the AED 46,000 entertainment add-back cites Article 32, and the AED 120,000 dividend removal cites Article 22. The return then applies the rate bands to the resulting taxable income.

Keep the adjustment schedule with the return workpapers permanently: it is the first document the FTA requests in an enquiry, and it lets next year's preparer see exactly which P&L lines were adjusted and why. A schedule that ties each line to an article and an evidence file is the gold standard.

Review the adjustments before year-end, not after. Entertainment can be reclassified, provisions can be crystallised by paying claims, and donations can be directed to qualifying entities, but only decisions taken before the period closes change the current year's answer.

Finally, calendar the filing deadline from the tax period end date: the return and payment are due within nine months. Late filing draws penalties even where the computation shows nil tax, so the adjustment schedule should be finished well before the deadline, not assembled under pressure.

This page works one computation end to end: the scenario sets out the starting figures, the adjustments section applies each tax correction with its article reference, and the step-by-step section shows every line of arithmetic. The key figures are collected here for quick reference.

Use this page as a template by replacing the scenario's numbers with your own while keeping the same adjustment logic: the method, the article references and the order of operations transfer directly to any similar computation.

Continue with these worked examples: worked example: taxable income exactly at AED 375,000, worked example: taxable income just above the threshold, and worked example: comprehensive multi-adjustment computation. For the underlying rules, see our guides to taxable income, deductible expenses and exempt income.