UAE Corporate Tax Guide: Determination of Taxable Income

The Federal Tax Authority (FTA) has published a Corporate Tax (CT) Guide focused on the Determination of Taxable Income (TI). This guide is essential for Taxable Persons as it provides clarity on calculating TI and, subsequently, the CT Payable under the UAE’s CT Law. Below, we offer a comprehensive overview of the guide along with key takeaways.

Overview of the Guide

The guide aims to assist Taxable Persons in determining their TI and calculating their CT Payable by addressing:

1. Adjustments to Accounting Income (AI): Necessary changes to AI to arrive at TI.
2. Adjustments to TI: Modifications needed for accurately calculating CT Payable.

The guide is also relevant for Qualifying Free Zone Persons (QFZP). To enhance understanding, it includes nine detailed case studies that illustrate essential TI determination concepts. These studies present specific scenarios, extracts from financial statements, tax adjustment tables, and explanations for taxable/non-taxable and deductible/non-deductible items.

Key Case Studies

1. Deductible and Non-Deductible Expenditure: Adjustments related to expenses, excluding Interest Deduction Limitation rules.
2. Interest Expenditure: Focuses on adjustments regarding interest expenditures, detailing General and Specific Interest Deduction Limitation Rules.
3. Tax Loss Relief: Covers the adjustments concerning Tax Loss relief and unutilised Tax Losses.
4. Interest and Tax Loss Relief: Addresses scenarios involving unutilised Net Interest Expenditure and Tax Losses.
5. Transfer of Tax Loss: Discusses provisions related to the transfer of Tax Losses and their carryforward limitations.
6. Cash Basis of Accounting: Addresses TI determination and CT calculation for entities with revenue not exceeding AED 3 million.
7. Unrealised Gains and Exempt Income: Adjustments for unrealised gains/losses and Exempt Income (like Dividends).
8. Foreign Permanent Establishment: Adjustments concerning exemptions related to Foreign Permanent Establishments.
9. Non-Resident Persons: TI determination for Non-Residents operating through a Permanent Establishment in the UAE.

Key Takeaways

• Incentives and Reliefs: The guide notes that there may be incentives and reliefs for Qualifying Business Activities under Article 20(2)g of the CT Law. Taxpayers are encouraged to monitor updates regarding these potential benefits.
• Deductible Local Taxes: Local taxes not classified as CT, such as municipal and property taxes, are deductible.
• Tax Loss Relief: Tax Loss relief should be applied to TI (tax-adjusted AI) before applying the relevant tax rates (0% and 9%).
• Audit Requirements: Entities with revenue exceeding AED 50 million must prepare audited financial statements by a UAE-registered auditor, adhering to the arm’s length standard.
• Election for Realisation Basis: Taxable Persons should decide on their election to apply the realisation basis for unrealised gains/losses promptly, as this choice is irrevocable once made.
• Employee Costs: Generally deductible if deemed necessary for business purposes, provided they meet the arm’s length standard. However, excessive contributions to pension funds (>15% of total remuneration) are not deductible.
• Expense Allocation: Expenses serving multiple purposes must be allocated fairly. If apportionment isn’t feasible, those expenses won’t be deductible for CT.
• Capitalised Non-Deductible Expenses: Depreciation on capitalised non-deductible expenses, like government fines, is also non-deductible.
• Pre-Incorporation and Pre-Trading Expenses: Such expenses may be deductible if properly recorded.
• Provisions and Recoveries: Reversals of provisions recorded prior to the first Tax Period will be taxable upon credit recognition in financial statements.
• Entertainment Expenses: The guide clarifies various classifications of entertainment expenses and their tax deductibility.
• Interest Expenditure Limitations: Specific provisions dictate which interest expenditures are disallowed under CT rules, ensuring proper calculations.
• Tax Loss Offsetting: Tax Losses must first offset the entity’s TI before being transferred to others or carried forward.
• Withholding Tax and Foreign Tax Credits: CT liability can be reduced by credits for WHT incurred inside the UAE and FTC incurred outside the UAE.
• Implications of Exempt Income: Expenditures related to deriving Exempt Income are not deductible.
• Transfer Pricing Adjustments: Such adjustments can affect the TI of related parties, emphasizing the need for thorough analysis.

Next Steps

Taxpayers should carefully assess the guide’s relevance and implications for their business. A structured approach to TI calculation and CT payable is critical, requiring collaboration across departments to gather necessary data. Implementing comprehensive tax policies and procedures will benefit both internal stakeholders and the FTA.

As most taxpayers’ financial years conclude on December 31, 2024, early consideration of the guide’s implications is crucial to ensure accurate CT calculations and compliance in advance of the return filing process.