.svg){kind=small}
%402x.svg){kind=small}
The UAE's corporate tax system prioritizes transparency and alignment with international standards. Accurate taxable income calculation is crucial for compliance. This article explores these key considerations:
Accounting Income and Adjustments
The taxable income calculation begins with the accounting income, which reflects the net profit reported in a company's financial statements. Adjustments are made to this income based on tax regulations. One major adjustment involves unrealized gains or losses. If a company adopts a realization basis, it recognizes gains or losses only when an asset is sold or transferred, not when its value fluctuates. The decision to use the realization basis must be made during the first tax period and is generally fixed for future periods.
Exempt income, such as dividends and profit distributions, must also be considered. Foreign-sourced income can be exempt if certain conditions are met, such as ownership thresholds and minimum tax rates in foreign jurisdictions.
Deductible and Non-Deductible Expenditures
Only certain business expenses are deductible for tax purposes. To qualify, the expenses must be "wholly and exclusively" for business operations. Common deductible costs include employee salaries and wages, as well as business-related expenses such as marketing, advertising, and operational costs.
Non-deductible expenses include those related to generating exempt income, such as dividends, as well as fines, penalties, and illegal payments like bribes. Capital expenditures, which provide long-term benefits to the business, must be capitalized rather than deducted. Additionally, transactions with related parties must adhere to the arm's length principle to avoid tax adjustments that could increase taxable income.
Interest Deductibility Rules
The UAE corporate tax system includes specific limitations on interest expense deductions. General rules restrict the deduction of net interest expenses exceeding AED 12 million or 30% of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), whichever is higher. This ensures that businesses do not disproportionately reduce taxable income.
Special rules apply to related-party loans to prevent tax avoidance. Interest on loans for purposes like dividend distributions faces restrictions unless a legitimate purpose is proven.
Tax Losses and Group Relief
When a business’s deductible expenses exceed its taxable income, tax losses occur. These losses can be carried forward to offset up to 75% of future taxable income, subject to certain conditions. Ownership continuity is one such condition, ensuring that the business structure remains largely the same when the loss is utilized.
Within corporate groups, tax losses may be transferred between related entities, provided they meet specific ownership and financial criteria.
Foreign Tax Credits
To avoid double taxation, the UAE’s corporate tax framework allows businesses to claim foreign tax credits for taxes paid in other jurisdictions. These credits can be applied against the UAE corporate tax due on the same income, up to the amount of the UAE tax. However, unused foreign tax credits cannot be carried forward or refunded, making tax planning crucial for businesses with international income streams.
In conclusion, carefully considering income exemptions, deductible expenses, and interest deduction limits helps businesses in the UAE calculate taxable income accurately, ensuring compliance and optimizing liabilities.
Reference/ Citation
Corporate Tax Guide | Determination of Taxable Income | CTGDTI1
