Starting Point: Net Accounting Profit or Loss
The process for determining taxable income begins with the net accounting profit or loss reported by the taxable person. This figure provides the baseline for further adjustments required by the UAE CT Law.
Key Adjustments for Accurate Taxable Income Calculation
- Exempt Income: Identify and exclude income that is exempt from CT, such as dividends received from resident juridical persons. These exemptions need to be properly accounted for to ensure that taxable income reflects only the amounts subject to tax.
- Unrealized Gains/Losses: If you have elected to recognize gains and losses on a “realization basis” for CT purposes, adjustments must be made for unrealized gains and losses. This election impacts how gains and losses are accounted for and should be reflected accurately in your taxable income.
- Applicable Reliefs: Apply any relevant tax reliefs as prescribed by the CT Law. These reliefs can affect the taxable income and need to be accounted for appropriately.
- Related Party Adjustments: Adjustments for transactions with related parties must be made to ensure that they are conducted at arm’s length and in compliance with the arm’s length principle.
Expense Deductibility Guidelines
The guide provides detailed rules on the deductibility of various expenses, which include:
- Business-Related Expenses: Expenses incurred solely for business purposes are fully deductible, except for those related to exempt income. If an expense serves both exempt and taxable income, a proportional deduction is permitted using prescribed allocation keys.
- Salaries and Employee Entertainment: Salaries paid at market rates are fully deductible, as are employee entertainment expenses.
- Other Entertainment Expenses: Expenses for client hospitality and other forms of entertainment are partially deductible. Specifically, only 50% of these costs are deductible, reflecting a more restrictive approach to such expenditures.
Foreign Tax Credit
The guide clarifies that the CT payable in the UAE may be reduced by any available Foreign Tax Credit (i.e., the amount of foreign taxes paid on foreign source income which has not been exempted) for the same tax period. For detailed information on managing withholding tax credits, refer to our article Mastering Withholding Tax and UAE Corporate Tax: A Guide to Managing Foreign Tax Credits
Compliance and Documentation
The FTA has provided templates to assist businesses in demonstrating compliance with these guidelines. These templates are designed to ensure that taxable income is calculated correctly and in accordance with FTA standards. Adhering to these templates is crucial for accurate reporting and avoiding potential issues during tax audits.
How Motei & Associates Can Assist
Navigating the new guidelines for determining taxable income can be complex. Motei & Associates is here to help your business adapt to these changes and ensure accurate tax reporting. Our experts offer:
- Guidance on Income and Expenses: We will review your current income and expenses to ensure they align with the new rules and provide advice on optimizing your tax position.
- Assistance in Preparing for your CT Returns: We will advise and assist you in preparing for your first CT return filing, ensuring compliance with the latest FTA guidelines.
- Strategic Tax Planning: Our team can assist in developing strategies to optimize your tax position and leverage available reliefs and credits effectively.
For expert assistance in navigating the detailed tax rules and optimizing your taxable income calculation, contact Motei & Associates. Our team is committed to helping you achieve accurate tax reporting and enhance your tax efficiency under the UAE Corporate Tax rules.
