UAE Corporate Tax – Calculating the tax payable

Once it is established that a Person qualifies as Taxable Person, either being a Resident (where global income is subject to tax in the UAE) or a Non-Resident (where UAE sourced or  attributable income is subject to tax in the UAE), it will be important to understand how the Taxable Income will be calculated.

A Taxable Person is expected maintain standalone Financial Statements in accordance with internationally accepted accounting standards. Whether the Financial Statements need to undergo an external audit process conducted by a licensed auditor in the UAE is an open area and this is expected to be clarified by way of Cabinet Decision or FTA guidance.

The Taxable Income for the tax period is the net profit or loss reported in the financial statements, after making adjustments as necessary, for the following items:

• Unrealized gains or losses. Businesses that prepare their financial statements on an accrual basis will have an option as to how they account for unrealized accounting gains or losses. Under option 1 the business can elect to recognize gains and losses for all assets and liabilities only when they are realized. Under option 2 the business can elect for the realization basis to apply only to assets and liabilities held on capital account. Gains and losses on other assets and liabilities would be included in taxable income on a current basis.  
• Exempt income. This includes dividends and other income distributions from a resident juridical person, dividends that qualify for participation relief, certain income from foreign permanent establishments and certain income from non-residents in connection with operating ships and aircraft.  
• Income that meets the conditions for Qualifying Group relief and Restructuring relief.
• Allowable deductions: Generally, this will be business expenses attributable to taxable activities. However, interest is subject to deduction limitation rules. These rules provide restrictions to discourage tax avoidance through excessive debt financing on intra-group transactions. The general rule is that businesses with net interest expenditure above a threshold to be set by the Minister will be allowed to deduct interest expenditure up to 30% of earnings before interest, tax, depreciation and amortization (EBITDA).  This will not apply to banks, certain other financial institutions, insurance businesses and individuals. There is also a specific Interest rule for Related Party loans used to finance certain CT exempt income. Here, the taxpayer will have to demonstrate that the main purpose was not to gain a CT advantage.  There are also special rules for entertainment expenses, which generally limit the deduction to 50% of cost.
• Deductions that are not allowable for tax purposes. This includes:
  • Donations, grants and gifts to non-qualifying entities;
  • Fines, penalties and other amounts awarded as compensation for damages or breach of contract;
  • Bribes or other illicit payments;
  • Dividends, share of profits or benefits of similar nature paid to the owner of the Taxable Person;
  • Payments to a natural person who is a Taxable Person or a partner in an unincorporated partnership;
  • Corporate Tax payable.
  • Recoverable Value Added Tax.
  • Tax levied outside the UAE.
  • Any other expenditure as specified in Cabinet Decisions.
• Transactions with Related Parties and Connected Persons
• Loss relief. This includes carried forward losses and the transfer of losses within the group.
• Incentives or special tax reliefs
• Foreign tax credit. This arises from foreign tax that is paid on income that is also liable to UAE CT. It can be used as a deduction to reduce taxable income.
• Any other adjustments specified by the Minister.

If Taxable Income, as calculated above, crosses the basic exemption threshold of AED 375,000, 9% CT will be calculated.

If Taxable Income is below basic exemption threshold, no CT is payable. If the calculation results in a Taxable Loss, the loss can be carried forward and used to offset up to 75% of taxable income in future tax periods. Any excess (or unused) profit, after the 75% limit has been reached, can continue to be carried forward to future periods and can be used to offset taxable income on the same basis indefinitely.  

BDO insight

While this article provides high-level guidance on how to arrive at the CT liability, each adjustment requires detailed and independent assessment as each will have an impact on how much tax the business will pay, and if mistakes are made, additional tax and penalties may well become payable. For this reason, we strongly recommend that businesses take early action to assess the expected financial and practical impact of CT. This should include an examination of how the various deductions will affect the expected tax liability, and the ability of accounting systems and processes to provide the information required. It will also be necessary to examine intra-group transactions, the availability of losses, the options for unrealized gains, and the impact of the interest limitation rules.        

Corporate Tax in the UAE