CORPORATE TAX IN UAE - TAXABLE INCOME

CORPORATE TAX IN UAE - TAXABLE INCOME

Corporate Tax is imposed on the taxable income of a taxable person during a tax period. We have seen various taxable persons coming under the purview of Corporate Tax in the previous articles. In this article we will discuss about taxable income and what are the adjustments to be taken into account in order to arrive at the taxable income.

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Taxable Income

The Corporate Tax regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income. Financial statements should be prepared in accordance with the accounting standards acceptable in the UAE. A majority of the companies in UAE are following IFRS for preparation of their financial statements and it is mandatory to comply with IFRS for banking institutions and certain public listed companies. However, as it stands any other acceptable accounting standards would be allowed to follow, depends on the type and status of the company. The financial year used in the financial statements shall be relevant tax period for the purpose of Corporate Tax.

The taxable person will have to make certain adjustments to determine their Taxable Income for the relevant Tax Period on arriving at the Accounting Profit. The major adjustments include unrealized gains and losses, exempt incomes like dividends, non-deductible expenses, tax loss reliefs, transfers between qualifying groups and business restructuring reliefs, any incentives or special reliefs for a qualifying business activity, adjustments for transactions with related parties and connected persons, and any other deductions as may be specified in a Cabinet Decision.

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What are Exempted Incomes

Decree Law exempts certain types of income from Corporate Tax. This means that a taxable person will need to disregard those incomes while calculating the taxable income. However, taxable persons who earn exempt income will remain subject to Corporate Tax on their taxable income.

The main purpose of certain income being exempt from Corporate Tax is to avoid double taxation on certain types of income. The below are the exempt incomes under Article 22 of the decree law.

·??????Dividend from a UAE Entity

·??????Dividend from foreign entity (Participation Exemption)

·??????Capital gains and other income (Participation Exemption)

·??????Income of foreign Permanent Establishment (A Fixed Place of Business)

·??????Income of a Non-Resident from operating or leasing of aircrafts/ships in international transportation

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**Participation exemption is an exemption for shareholders in a company on dividends received, and potential capital gains arising on the sale of shares. The primary condition is that a shareholder should hold 5% or greater ownership in the company to have a Participation Interest.

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What are Non-Deductible Expenses

A non-deductible expense is an expense that are not eligible for deduction from gross income. A non-deductible expense shall be added back to the net income while calculating the taxable income. Normally all legitimate expenses incurred wholly and exclusively in the performance of the business will be deductible.

Expenses that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenses treated as?deductible.?The taxable person should be in a position that he is able to prove the relevant part which is deductible is incurred wholly and exclusively for business purposes.

Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. Following are different Non-Deductible Expenses for the purpose of calculation of Taxable Income:

·??????Expenditure incurred for earning exempt income

·??????50% of Entertainment expenses

·??????Net interest expenditure up to 30% of EBIDTA

·??????Donations/gifts made to an entity that is not a Non-Qualifying Public Benefit Entity

·??????Fines & Penalties (other than compensation for damages/breach of contract)

·??????Dividends, profit distributions or benefits paid to an owner of the Taxable Person

·??????Withdrawals by Taxable Natural Persons or a partner in an Unincorporated partnership

·??????Corporate Tax, Recoverable VAT, Foreign Taxes etc.

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Transfers within a Qualifying Group and Business Restructuring Relief

Two taxable persons (other than a Qualifying Free Zone Person) can be considered as a Qualifying Group if they are resident or have a permanent establishment in UAE if non-resident and either a taxable person holds 75% of ownership in other taxable person or a third party holds 75% of ownership of both taxable persons.

No gain or loss needs to be taken into account in determining the Taxable Income in relation to the transfer of one or more assets or liabilities between two Taxable Persons that are members of the same Qualifying Group.

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Similarly, any gain or loss arising out of any of the following business restructuring shall be disregarded in determining Taxable Income.

a. A Taxable Person transfers its entire Business or an independent part of its Business to another Person who is a Taxable Person or will become a Taxable Person as a result of the transfer in exchange for shares or other ownership interests of the Taxable Person that is the transferee.

b. One or more Taxable Persons transfer their entire Business to another Person who is a Taxable Person or will become a Taxable Person as a result of the transfer in exchange for shares or other ownership interests of the Taxable Person that is the transferee, and the Taxable Person or Taxable Persons that are the transferor cease to exist as a result of the transfer.

Transactions with Related Parties and Connected Persons

As per the Transfer Pricing provisions of UAE Corporate Tax, it is required that a transaction with a Related Party or a Connected Person must meet the arm’s length standard and should be consistent with the results of transactions that would have been made with other third parties.

An arm's length transaction refers?to a business deal in which buyers and sellers act independently without one party influencing the other. The tax authority wants to make sure that no transactions are influenced by any personal relationship or familiarity which ultimately leads to tax benefits.

If the result of the transaction between Related Parties or Connected Person does not fall within the arm’s length range, the Authority shall adjust the Taxable Income to achieve the arm’s length result that best reflects the facts and circumstances of the transaction.

Thank you and stay connected for more Corporate Tax related topics.