Determining Taxable Income for Corporate Tax Purposes in UAE

Taxable persons are required to determine Taxable Income for corporate tax purposes in the UAE. Taxable income is the accounting net profit of a business after subtracting allowable deductions, exemptions, and credits from the total income. Therefore, to determine Taxable Income in compliance with the Corporate Tax Regulation in UAE, taxable persons are advised to seek the services of Tax Consultants in UAE.  

What Standards Must Be Used to Prepare Financial Statements?

To prepare financial statements in compliance with the Corporate Tax Law in UAE, taxable persons are required to prepare their financial statements as per the accounting standards accepted in UAE, the International Financial Reporting Standards (IFRS).

What Corporate Tax Adjustments to the Financial Statements Will Be Required to Calculate Taxable Income?

In order to comply with the UAE Corporate Tax Law, certain adjustments must be made to the accounting net profits or losses. These adjustments include: 

• Accounting for unrealized gains or losses, depending on the choice made regarding the application of the realization principle.
• Taking into consideration exempt income, such as dividends, which are not subject to corporate tax.
• Accounting for intra-group transfers ensuring proper treatment and elimination of any intercompany transactions.
• Excluding deductions that are not permitted for tax purposes, ensuring that only deductions are considered.
• Making necessary adjustments for transactions with Related Parties and Connected Persons to ensure they are conducted at arm’s length and reflect their market value.
• Any incentives or tax reliefs

These adjustments are essential to accurately calculate the taxable income and ensure compliance with the Corporate Tax Law in UAE. 

What Corporate Tax Adjustments to the Financial Statements Will Be Required to Calculate Taxable Income?

In order to comply with the UAE Corporate Tax Law, certain adjustments must be made to the accounting net profits or losses. These adjustments include: 

• Accounting for unrealized gains or losses, depending on the choice made regarding the application of the realization principle.
• Taking into consideration exempt income, such as dividends, which are not subject to corporate tax.
• Accounting for intra-group transfers ensuring proper treatment and elimination of any intercompany transactions.
• Excluding deductions that are not permitted for tax purposes, ensuring that only deductions are considered.
• Making necessary adjustments for transactions with Related Parties and Connected Persons to ensure they are conducted at arm’s length and reflect their market value.
• Any incentives or tax reliefs

These adjustments are essential to accurately calculate the taxable income and ensure compliance with the Corporate Tax Law in UAE. 

What is the Treatment of Unrealized Gains and Losses Arising From Accounting Fair Value or Adjustments?

When a business in the UAE prepares its financial statements on an accrual basis, it has the following options for the treatment of unrealized accounting gains and losses for UAE Corporate Tax purposes.  

Option 1:

Realization Basis for all assets and liabilities, under this option the taxable person can choose to recognize gains and losses on a realization basis for corporate tax purposes in UAE. Therefore, this confirms that unrealized gains will not be subject to taxation until they are realized and conversely, any unrealized losses would not be deductible until they are realized. 

Option 2: 

Realization Basis for capital account assets and liabilities only alternatively, the taxable person can elect to recognize gains and losses on a realization basis for corporate tax purposes in UAE, however only for assets and liabilities held on capital account would not be subject to corporate tax or deductible, respectively until they are realized.    

To add on, unrealized gains and losses arising from assets and liabilities held in the revenue account would still be included in taxable income on a current basis. Therefore, assets and liabilities are considered to be held on capital account when they are not expected to be sold or traded during the regular course of business operation.   

What is the Realization Principle for Corporate Tax Purposes in UAE?

The realization principle is a concept applied in the UAE corporate tax regime to determine when income is realized for Corporate Tax purposes. The UAE corporate tax law allows taxable persons to utilize the realization principle to calculate their taxable income. As per this principle, income becomes taxable and a deduction can be claimed only when a gain or loss is actually realized. Whereas, this realization occurs when an asset is sold or terminated. For instance, when applying the realization principle, the taxable income for each Tax Period in the UAE excludes gains and losses related to assets or liabilities that are subject to fair value or impairment accounting.   

How Are Capital Gains Taxed for Corporate Tax Purposes?

In terms of capital gains taxation, there is no distinction between gains arising from the sale of capital assets and those rising from the sale of non-capital (revenue) assets. Capital gains obtained from the disposal assets are included in the annual taxable income in the same manner as other income from the business. However, capital gains from the sale of shares may be exempt from corporate income tax in UAE, provided certain conditions are satisfied. 

Seek the Expert Services of Tax Consultants in UAE

To determine Taxable Income in compliance with the Corporate Tax Law in UAE, taxable persons are advised to seek the services of Tax Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.    

Read More: “Applicable Taxable Income” Threshold under UAE Corporate Tax Confirmed