UAE Publishes Guide on Determination of Taxable Income for Corporate Income Tax

Federal Decree-Law No. 47 of 2022, also known as the Corporate Tax Law, was issued on October 3, 2022, and published in Issue #737 of the Official Gazette of the United Arab Emirates (UAE) on October 10, 2022. This legislation establishes the framework for imposing a federal tax on corporate and business profits, referred to as Corporate Tax, within the UAE. The law applies to tax periods beginning on or after June 1, 2023.

In July 2024, the Federal Tax Authority (FTA) of UAE published a comprehensive 107-page “Determination of Taxable Income Corporate Tax Guide | CTGDTI1.” This Guide offers general guidance for determining Taxable Income and calculating Corporate Tax Payable under the UAE Corporate Tax Law. It should be read alongside the Corporate Tax Law, implementing decisions, and additional FTA guidance.

It outlines, amongst others:

• The necessary adjustments to Accounting Income to determine Taxable Income.

• The adjustments needed to calculate Corporate Tax Payable.

Specific aspects of the Corporate Tax Law, such as Tax Groups, Unincorporated Partnerships, Small Business Relief, Free Zone Persons, Extractive and Non-Extractive Natural Resource Businesses, Qualifying Group Relief, Business Restructuring Relief, and Transfer Pricing, are covered under specialized guides published by the FTA.

DETERMINING TAXABLE INCOME

Under the UAE Corporate Tax Law, the starting point for determining Taxable Income is the Accounting Income. This is the net profit or loss for a tax period as reported in Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS) or IFRS for Small and Medium-sized Entities (IFRS for SMEs), or as per the income and expenditure statement maintained by those following the Cash Basis of Accounting.

Adjustments to Accounting Income, as specified in Article 20(2) of the Corporate Tax Law, are necessary to arrive at the Taxable Income for Corporate Tax purposes.

CALCULATION OF CORPORATE TAX PAYABLE

Once Taxable Income for a tax period is established, it is taxed as follows:

• 0% on the portion of Taxable Income up to AED 375,000.

• 9% on the portion of Taxable Income exceeding AED 375,000.

For Qualifying Free Zone Persons, Corporate Tax is applied as follows:

• 0% on Qualifying Income.

• 9% on Taxable Income that is not Qualifying Income.

This guide also applies to Qualifying Free Zone Persons regarding Taxable Income that is not Qualifying Income. Corporate Tax liability is first reduced by any Withholding Tax Credit, followed by a Foreign Tax Credit to determine the Corporate Tax Payable or refundable. As of now, the Withholding Tax rate in the UAE is 0%, pending the issuance of a Cabinet Decision detailing the income categories subject to Withholding Tax.

FINANCIAL STATEMENTS

Financial Statements, which record a business’s financial performance, are crucial for calculating Taxable Income. Taxable Persons whose Revenue does not exceed AED 3 million in a tax period may use the Cash Basis of Accounting. Those with Revenue exceeding AED 3 million must use the Accrual Basis of Accounting, except in exceptional cases approved by the FTA.

Revenue thresholds (AED 3 million and AED 50 million) must align with the arm’s length standard. Taxable Persons with Revenue exceeding AED 50 million must maintain audited Financial Statements, with audits conducted by UAE-registered auditors in compliance with Federal Law No. 41 of 2023 on Auditing Regulation and other applicable legislation.

TAX PERIOD

The Tax Period for a Taxable Person (excluding natural persons) is their Financial Year or part thereof for which a Tax Return must be filed. This typically corresponds to a 12-month period for which Financial Statements are prepared. If a Taxable Person applies to change their Tax Period, the new period must be between six and 18 months. For natural persons, the Tax Period is always the Gregorian calendar year, from January 1 to December 31, provided their Turnover exceeds AED 1 million. The first Tax Period for natural persons will be from January 1, 2024, to December 31, 2024.

For further details, consult the full Corporate Tax Law, implementing decisions, and additional FTA guidance.

SOURCES/RECOMMENDED READ: 

• FTA (tax.gov.ae)