As corporate tax is now in place in the UAE, there is a need to attain some basic tax knowledge. However, there is widespread information available on various online platforms, some of which are not credible. Therefore, we need to get information from the source, i.e., Federal Decree-Law No. 47 of 2022, also known as tax law. In this blog, our basic theme is to understand taxable income and the general rules for determining taxable income as per the UAE tax law. The idea is to keep things simple and understand them in a basic manner. Let’s start with taxable income.
What is Taxable Income?
We often come across the income thresholds for corporate tax rates. For instance, in the UAE, the standard CT rate is 9% for taxable income over AED 375,000, while it is 0% for taxable income up to AED 375,000 in a tax year. So, the term that is of importance here is taxable income, which is usually not similar to accounting income or profit. Taxable income is the “adjusted accounting profit” with adjustments for allowable incomes and deductions. As per the tax law, certain expenses or incomes are not allowed for a deduction; therefore, only allowable expenses are deducted. In this way, we arrive at taxable income. In simple words, taxable income is the profit of a business as per the tax law of a given country.
Rules for Determining Taxable Income in the UAE
Article 20 of the tax law provides detailed information on the general rules for determining taxable income in the UAE. Let’s highlight the rules one by one.
Separate taxable income:
The taxable income of every different business or taxable person should be calculated separately based on separate financial statements. The taxable person should prepare financial statements as per accepted accounting standards in the State.
Adjustments:
The taxable income of a tax period is the accounting profit for that period. However, there are the following adjustments in the accounting profit to reach taxable income:
- a) Any unrealized gain or loss.
- b) Exempt income.
- c) Tax reliefs.
- d) Allowable deductions.
- e) Transactions with Related Parties and Connected Persons.
- f) Tax loss relief.
- g) Any incentives or special reliefs for a qualifying business activity specified in a decision issued by the Cabinet at the suggestion of the Minister.
- h) Any income or spending that has not otherwise been taken into account in determining the taxable income under the provisions of the tax law as may be specified in a decision issued by the Cabinet at the suggestion of the Minister.
- i) Any other adjustments specified by the Minister.
Realization Basis of Gains and Losses:
When calculating the taxable income for the relevant tax period, a business preparing financial statements on an accrual basis may elect to take into account gains and losses on a realization basis concerning:
a) all assets and liabilities that are subject to fair value or impairment treatment under the relevant accounting standards; or
b) all assets and liabilities held on the capital account at the end of a tax period, while taking into account any unrealized gain or loss that arises in connection with assets and liabilities held on the revenue account at the end of that period.
Assets held on the capital account include assets that the taxable person does not trade. These include assets that undergo depreciation and are also referred to as PPE (property, plant, and equipment), investment property, intangible assets, and other non-current assets. On the other hand, liabilities held on the capital account include liabilities that are not deductible under the tax law. These are non-current liabilities as per the generally accepted accounting principles. All other assets and liabilities are assets and liabilities held in the revenue account.
Minister’s Suggestion:
The Minister may prescribe any of the following for the tax law:
a) Conditions under which a taxable person may use a cash basis of accounting for financial reporting.
b) Any changes or adjustments to the accounting standards to arrive at the taxable income for the relevant tax period.
c) A different basis for calculating taxable income for qualifying business activity.
A taxable person can apply to the authority for a change from a cash basis of accounting to an accrual basis. The change applies from the start of the tax period in which the application was made or from the future tax period.
Conclusion:
For tax purposes, the relevant income subject to taxation is “taxable income”. A business calculates taxable income as per the applicable tax laws. However, in the UAE, the tax law provides detailed information on the general rules for determining taxable income. A business should adjust its accounting profit as per the tax law and arrive at taxable income. Adjustments include unrealized gains, exemptions, reliefs, tax loss relief, allowable deductions, and so on. Furthermore, there are other general rules to calculate taxable income. The key is to collect relevant information and be tax-compliant. However, if needed, it is always a good idea to contact or consult a tax expert.
Creative Zone Tax & Accounting:
From a basic point of view, it is good to grasp knowledge; however, taxation can take a lot of time. Therefore, we recommend consulting a tax expert. Our team is qualified and equipped with the necessary skills to keep your tax compliance on track and let you focus on your key business. Contact us today.
Disclaimer:
The information provided might be outdated with time as there is continuous updating of the tax laws and regulations. Therefore, this blog cannot be a reference for tax planning or tax advice. We strongly advise you to consult a tax consultant or lawyer for all your tax matters.
