Calculating Taxable Income under the UAE Corporate Tax Law

Introduction – Chapter 6 – Calculating Taxable Income under the UAE Corporate Tax Law

Chapter 6 of the UAE Corporate Tax Law, details the rules and regulations for Calculating Taxable Income of a Taxable Person for determining the Corporate Tax Payable under the Law. The rules and regulations aim to reduce administrative complexity as well as compliance costs for UAE taxpayers.

Article 20 – General Rules for Determining Taxable Income under the UAE Corporate Tax Law

The Taxable Income is the income of a Taxable Person which will be subject to Corporate Tax under the UAE Corporate Tax Law. Thus, it is essential to determine how to calculate the Taxable Income. For that purpose, certain general rules have been provided under the UAE Corporate Tax Law to simplify the procedure for calculating the Taxable Income under the UAE CT Law. Let us understand them in detail.

• Taxable Income to be determined on the basis of Financial Statements: Each Taxable Person’s Taxable Income shall be ascertained independently, based on adequate, standalone Financial Statements prepared for the purposes of financial reporting in conformity with the UAE’s accepted accounting standards. International Financial Reporting Standards (IFRS) is the most accepted accounting standard in the UAE.
  Accounting Income to be the Taxable Income: The Accounting Income for a Tax Period is the Taxable Income for that Tax Period of the business after making the necessary adjustments.

• What is Accounting Income under the UAE Corporate Tax Law?
  Under the UAE Corporate Tax Law, accounting income means the accounting net profit or loss incurred by a Person as per the Financial Statements prepared by such Person under Article 20 of the Law.
• Adjustments to Accounting Income to calculate Taxable Income
  The accounting income will take the following  adjustments into consideration to calculate the Taxable Income :
  • Any unrealized gain or loss calculated under Clause 3 of Article 20.
  • Exempt Income earned by the Taxable Person as specified in Chapter 7 of the UAE Corporate Tax Law.
  • Reliefs claimed by the Taxable Person as listed in Chapter 8 of the UAE Corporate Tax Law.
  • The deductions claimed by the Taxable Person as mentioned in Chapter 9 of the UAE Corporate Tax Law.
  • Transactions with Related Parties or Connected Persons by the Taxable Person, according to the provisions of Chapter 10 of the UAE Corporate Tax Law.
  • Tax Loss relief claimed by the Taxable Person in accordance with the provisions of Chapter 11 of the UAE Corporate Tax Law.
  • Qualifying Business Activity: Any financial incentives or special treatment for a Qualifying Business activity as detailed in a Cabinet decision made on the Minister’s advice.
  • Income not previously taken into account: Any income or expense that has not previously been accounted for in calculating the Taxable Income under the terms of the UAE Corporate Tax Law, as may be detailed in a decision made by the Cabinet on the Minister’s recommendation.
  • Any additional modifications that the Minister may deem necessary.

Election by Taxable Person to take into account Gains and Losses on Realization Basis and not Accrual Basis

Realization basis : An income will only be taxed or a deduction will only be taken into account when th=he gains or losses associated with such assets/liabilities or deduction is realized. Election: Subject to  conditions prescribed by the Minister, a Taxable Person that prepares Financial Statement on an accrual basis may elect account  gains and losses on realization basis for the following-

a) Option I: Assets and liabilities at fair value:

Gains and losses incurred with respect to  assets and liabilities which are valued at their fair value or  impairment accounting as per the applicable accounting standards shall not be considered while calculating the Taxable Income.

This means that  unrealized gains will not be taxable until they are realized or  unrealized losses will not be deductible till they are realized, or

b) Option II: Assets and liabilities held in Capital Account:

Gains and losses incurred with respect to  assets and liabilities that are held on the Capital Account at the conclusion of a Tax Period and all unrealized gains or losses attributable to assets and liabilities that are kept on the revenue account at the end of the Tax Period shall not be considered while calculating the Taxable Income.

In this case, only unrealized gains held in the Capital Account will not be taxable till they are realized. But the unrealized gains in the Revenue Account will be taxed on accounting basis that is being followed by the Taxable Person.

Defining certain terms for purposes of Article 20 of the UAE CT Law

a) Assets held on capital account: Assets that the Person does not transfer, that are eligible for depreciation, or that are classified as property, plant and equipment, investment property, intangible assets, or other non-current assets under applicable accounting rules are referred to as “Assets held on capital account.”

b) Liabilities held on capital account: It refers to obligations whose incurrence does not result in deductible expenses under Chapter Nine of the UAE Corporate Tax Law or obligations classified as non-current liabilities under relevant accounting standards.

c) Assets and liabilities held on a revenue account: Assets and liabilities that are not maintained on a capital account are referred to as “assets and liabilities held on a revenue account”.

d) Unrealized gain or loss: Foreign exchange gains and losses are included in the definition of “unrealized gain or loss.”

Powers of the Minister under Article 20 of the UAE Corporate Tax Law

The Minister may prescribe provisions for the below-mentioned purposes under the UAE Corporate Tax Law:

1. To prepare Financial Statement on Cash Basis: Conditions and circumstances under which the preparation of financial statements on a cash basis by a Person.
2. Adjustments to the accounting standards: Any adjustments to the accounting standards to be used in calculating the Taxable Income for a Tax Period.
3. Qualifying Business’s Taxable Income: An alternative methodology for calculating a Qualifying Business Activity’s Taxable Income.

Alteration in Method of Accounting by Taxable Person to calculate Taxable Income under the UAE Corporate Tax Law

Cash to Accrual basis: A Taxable Person may apply to the Federal Tax Authority to alter its accounting system from cash basis to accrual basis from:

1. The beginning of the Tax Period in which the application is made, or
2. The beginning of a future Tax Period,

This is subject to  any specifications prescribed by the Minister under Article 20.

Conflict between UAE Corporate Tax Law and Accounting Standards: The provisions of the UAE Corporate Tax Law shall have precedence over the accounting standards in force in UAE to the extent of any inconsistency between them and the applicable accounting standards.

Want to determine your Taxable Income under the UAE Corporate Tax Law?

Article 21 – Small Business Relief under the UAE Corporate Tax Law

Who can apply for Small Business Relief under the UAE Corporate Tax Law?

A Taxable Person, who is a Resident, may choose to be treated as not having derived any Taxable Income for a Tax Period if both of the following conditions are met:

1. Doesn’t Exceed Threshold: The Taxable Person’s Revenue for the applicable Tax Period and any prior Tax Periods did not exceed a threshold that the Minister will determine; and
2. Fulfils other conditions: The Taxable Person satisfies all other requirements imposed by the Minister.

Which provisions of the UAE Corporate Tax Law will not be applicable  on a Taxable Person eligible for Small Business Relief?

The following clauses of the UAE Corporate Tax Law shall not apply to Taxable Persons to whom Clause 1 of Article 21 applies:

1. Exempt Income as described in Chapter 7 of the UAE Corporate Tax Law.
2. Reliefs as listed in Chapter 8 of the UAE Corporate Tax Law.
3. The deductions, listed in Chapter 9 of the UAE Corporate Tax Law.
4. Tax Loss Relief as outlined in Chapter 11 of the UAE Corporate Tax Law.
5. Requirements for preparation and maintenance of Transfer Pricing Documentation under Article 55 of the UAE Corporate Tax Law.

Request for documents by Federal Tax Authority to ensure compliance with conditions for claiming Small Business Relief

The Federal Tax Authority may ask the Taxable Person for any pertinent information or records within the timeline that the Authority specifies to verify compliance with the conditions of claiming Small Business Relief under Article 21 of the UAE Corporate Tax Law.

Can you claim Small Business Relief for my business activities in UAE?