The Federal Tax Authority, UAE has recently released a Corporate Tax Guide (CTG) for the determination of taxable income. This guide provides clear instructions to businesses and taxpayers on how to determine their taxable income and calculate corporate tax under the UAE Corporate Tax Law. The businesses must gain an understanding of the rules and principles mentioned in this guide to ensure compliance with the UAE’s corporate tax system thus eliminating the risk of law violations and penalties. The current article aims to provide an overview of this guide, simplifying the important information for the readers.
Overview of the Corporate Tax Guide
The guide is divided into five sections: glossary, introduction, overview, key concepts, and case studies. The glossary section includes definitions of key terminologies related to corporate tax in alphabetical order.
The introduction section sets out an overview of the guide’s purpose of assisting businesses in determining their taxable income and corporate tax payable as well as providing important information regarding:
- Adjustments are required to be made to the Accounting Income for determining the Taxable Income under the Corporate Tax Law
- Adjustments are required to be made to the Taxable Income for calculating the Corporate Tax Payable under the Corporate Tax Law
The introduction is followed by an overview section that provides a summary of the guide and outlines the method for computing taxable income. The taxable person first computes his/her accounting income which refers to the net profit or loss a company reports on its financial statements for the relevant tax period. After that, several adjustments are made to the accounting income as per Article 20(2) of the Corporate Tax Law. These adjustments include:
- Unrealized gains and losses: Profits or losses that haven’t been realized through a sale or transaction yet.
- Exempt Income: Income that is not subject to corporate tax (such as income from foreign permanent establishments and dividends).
- Reliefs: Deductions or allowances that reduce taxable income or the amount of tax to be paid such as qualifying group relief and business restructuring relief.
- Non-deductible Expenditure: Expenses that cannot be deducted for tax purposes such as those expenses that are not incurred exclusively for business or expenditures of a capital nature.
- Related Party Adjustments: Adjustments for transactions with related entities that might affect taxable income.
- Other Factors: Any other relevant factors that can influence the amount of total taxable income.
After making all the above adjustments, the taxable person can calculate his/her final taxable income.
The fourth section of the Corporate Tax Guide discusses key concepts that are relevant to the calculation of taxable income and the amount of corporate tax payable. It stresses that the first step for calculating taxable income is the determination of accounting income. If the revenue incurred by the taxable person does not exceed AED 3 million, the cash basis of accounting will be applied. However, once the revenue generated exceeds AED 3 million in a tax period, taxable persons are mandated to prepare financial statements using the accrual basis of accounting. Furthermore, if the annual revenue generated exceeds AED 50 million during the relevant tax period, the taxable person must get their financial records audited.
The fifth section of the guide includes nine case studies that provide important information regarding the determination of taxable income and tax liabilities. Factual information is mentioned in the start of these case studies followed by tax adjustment tables and explanatory notes regarding the calculation of taxable income. These case studies cover important topics including:
- Deductible and non-deductible expenditure: This case study covers the adjustments to be made to accounting income for tax purposes by distinguishing between deductible and non-deductible expenditure.
- Interest expenditure: The case study focuses on the adjustments to be made to accounting income regarding interest expenditure by applying both general and specific interest deduction rules.
- Tax Loss Relief: The third case study mentioned in the corporate tax guide includes adjustments to be made to the accounting income relating to tax loss relief and the treatment of unutilized tax losses.
- Interest expenditure and tax loss relief: The case study includes the adjustments to be made to accounting income in scenarios where there is both unutilized net interest expenditure and tax losses.
- Transfer of Tax Loss and Limitation on Tax Loss carried forward: This case study addresses the rules regarding the transfer of a tax loss and the restrictions on utilizing tax losses that are carried forward.
- Cash Basis of Accounting: This case study includes information pertaining to the calculation of taxable income and corporate tax payable for a taxable person incurring revenue equal to or less than AED 3 million, applying a cash basis of accounting.
- Unrealized gains and losses, Exempt Income: The case study 7a elaborates on adjustments to be made to accounting income for unrealized gains or losses, and for Exempt Income.
- Foreign Permanent Establishment: Case study 7b covers the adjustments to be made to taxable income regarding the foreign permanent establishment exemption.
- Non-Resident Person Conducting Business in the UAE through a Permanent Establishment: This last case study includes important information regarding the determination of taxable income and corporate tax payable for a non-resident person conducting business in UAE through a permanent establishment.
In conclusion, the determination of taxable income is a complicated task, and the recent release of the Corporate Tax Guide by the Federal Tax Authority is an attempt to simplify the important information regarding the implementation of UAE corporate tax law. It’s advisable to seek the expertise of a qualified tax consultant in UAE to further ensure effective compliance with corporate tax law.
