The Federal Tax Authority (FTA) in the UAE has issued a CIT Guide, referenced as CTGDTI1, which outlines how taxable income for CIT is calculated.   This guide explains the regulations for determining taxable income, which are mainly outlined in Federal Decree-Law No. 47 of 2022 concerning the Taxation of Corporations and Businesses (CIT Law).    I am sorry, but it seems like you have not provided any text for paraphrasing.  

Dubai : Even though certain practical aspects regarding the determination of taxable income were already expected in both the CIT Law and other previously published Guides by the FTA, the latest Guide explores the details of specific subjects.

The Guide contains nine (9) comprehensive case studies that demonstrate important principles used to calculate a taxpayer's taxable income.   These concepts include interest expenses, tax relief for losses, cash accounting method, and unrealized gains and losses, among others.

Overview on the calculation of CIT payable

In accordance with Article 20 of the CIT Law, a taxpayer's taxable income should be determined using their individual Financial Statements, which must comply with accepted accounting standards in the UAE such as IFRS or IFRS for Small and Medium Enterprises (SMEs), for those with revenue below AED 50 million.   

The Guide highlights that companies making more than AED 50 million in revenue must have their Financial Statements audited by a registered auditor in the UAE in accordance with local laws.  

The accounting profit shown in the individual Financial Statements will be adjusted for certain items such as expenses that cannot be deducted, income that is exempt, allowances for specific transactions, or changes to transactions between related parties.   A taxpayer can potentially lower their taxable income by using any tax losses from previous years that can be carried forward.  

When a taxpayer reaches their taxable income, the Corporate Income Tax (CIT) owed will be determined by applying a 9% rate to the taxable income that exceeds AED 375,000. For individuals who qualify as Free Zone Persons, the part of their taxable income that is considered Qualifying Income will not be taxed, while the part that is not Qualifying Income will be taxed at the 9% rate.  

The CIT liability determined from the calculation above can be decreased by any relevant withholding tax credit.   This will be followed by foreign tax credits in order to determine the CIT that must be paid or refunded.  

Main considerations from the Guide

Exempt income

The guide explores the exceptions on specific revenue sources outlined in the UAE Corporate Income Tax Law, such as:  

·        Dividends given out by companies in the UAE (such as domestic dividends) are exempt from requirements for further distribution.  

·        "Shareholders will receive dividends and profits from overseas companies in which they own a significant stake, with a minimum of 5% ownership or an acquisition cost of over AED 4 million, and the investment period must be at least one year."  

·        Additional income and profits obtained from companies in which the recipient has a participating stake as mentioned earlier (such as profits or losses from selling, currency gains and losses, or impairment gains and losses);  

·        Other sources of income and profits obtained from companies in which the recipient has a stake, as mentioned earlier (including gains or losses from selling assets, foreign exchange gains and losses, or impairment gains and losses).  

The exceptions mentioned are discussed in detail through the analysis of two real-life examples (case study 7a and 7b) in the Guide.

The Guide also highlights that these exceptions are equal, meaning that costs spent on generating any income that is exempt for Corporate Income Tax purposes cannot be subtracted.  

Non-deductible expenditure

Expenditure that is spent solely for the benefit of the taxpayer's business and is not considered capital will usually be eligible for deduction for CIT purposes.   However, certain categories of expenses are not allowed to be deducted as per the regulations in the UAE for CIT. If an expense falls into a non-deductible category for CIT, it must be added back when determining the taxable income.  

Non-deductible expenditure for CIT purposes includes:

• Expenditure which is not incurred for the purpose of the taxpayer's business;
• Expenditure which is incurred in deriving exempt income;
• Expenditure which is capital in nature;
• Donations or gifts made to organisations which are not Qualifying Public Benefit Entities;
• Fines, penalties, bribes and illicit payments;
• Expense registered for the recognition of CIT;
• Tax imposed on income outside the UAE;
• Recoverable VAT;
• Payments to related parties / connected persons which are not valued at arm's length; and
• Losses which are not connected to the taxpayer's business.

Expenditure incurred for more than one purpose

The Guide states that if expenses are used for multiple purposes, any part of the expenses that are solely and exclusively used to generate taxable income can be fully deducted.   For expenses that cannot be directly linked to a specific purpose, only a portion calculated fairly and reasonably can be deducted.  

The Guide explains that what is considered fair and reasonable will vary based on the details and context of each individual case.   It also outlines specific factors that should be taken into account when determining how expenses are divided among different income sources.   These factors consist of:  

• Cause and effect relationship (i.e., machinery running hours for allocating maintenance costs); or
• Relationship between the expenditure and the benefits received.

In addition to the previous rules, the Guide now states that the criteria for allocating expenses must stay the same throughout the entire tax period, unless there is a significant change in circumstances that warrants a change in the allocation method.

When costs cannot be divided in a fair and reasonable way, they cannot be claimed as a deduction for Corporate Income Tax purposes and will be fully rejected.

Pre-incorporation and pre-trade expenditure

Costs related to starting a business, such as registration fees and feasibility studies, that a company incurs before officially becoming incorporated can be deducted for corporate income tax purposes.   These costs must be properly documented in the company's income statement according to accounting standards once the business is officially incorporated.  

Once a company is formed but has not yet begun generating revenue, expenses incurred for activities such as product development, marketing, and advertising are still considered deductible if they are properly recorded in the financial statements and meet the standard criteria for deductibility outlined in the CIT regulations.  

Creation and reversal of provisions

The Guide states that, typically, provisions set aside by a business for legal or other obligations will be considered eligible for deduction as long as they meet the general criteria for deductibility outlined in the CIT Law. Consistent with this, any income generated from reversing provisions that were previously deductible for CIT purposes will be subject to full taxation.  

General interest deduction limitation

The deduction of net interest expense (which is the amount of interest expense exceeding interest income) for Corporate Income Tax (CIT) purposes is capped at the greater amount of either AED 12 million or 30% of a taxpayer's adjusted Earning Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The adjusted EBITDA is determined as the taxable income for a specific tax period, excluding adjustments related to limits on general interest deductions and provisions for tax loss relief.   , with adjustments for:

• Net interest expenditure;
• Depreciation and amortisation expenditure;
• Any interest expenditure (minus interest income) related to historical financial assets and liabilities held prior to 9 December 2022; and
• Interest expenditure (minus interest income) relating to Qualifying Infrastructure Projects.

The net interest expenses that are not permitted under the mentioned regulations can be saved and used in the following ten tax periods.   The manual gives specific scenarios that demonstrate how to compute the net interest expenses and adjusted EBITDA.  

Specific interest deduction limitation

In addition to the above, the CIT regulations establish a specific restriction on certain transactions.   Interest expenses from a loan received from a related party will not be tax-deductible in the following situations:

• Payment of dividends or profits to a related party;

• Redemption, repurchase, reduction, or return of share capital to a related party;

• Contribution of capital to a related party; or

• Acquisition of an ownership stake in a company that is, or becomes, a related party post-acquisition.

However, the aforementioned restriction does not apply if the taxpayer can prove that the loan was not obtained for the purpose of obtaining a CIT benefit.   Such proof will be considered valid if the recipient of the interest is subject to CIT or a similar tax at a rate of at least 9%.   

Tax loss relief

During a specific tax period, a taxpayer that incurs tax losses can use them in future periods to reduce taxable income, up to a maximum of 75% of taxable income.

This rule does not apply to (i) losses that occurred before the introduction of CIT, (ii) losses incurred before a person is classified as a taxpayer for CIT purposes, and (iii) tax losses related to exempt income.   

  If a taxpayer cannot use a tax loss to reduce their own taxable income, the CIT rules allow for transferring the losses to another taxpayer if certain conditions are fulfilled (such as one entity holding at least 75% of the shares of the other entity or having a common ownership of over 75%, in the same financial year, following the same accounting standards, etc.).   

The regulations for the Corporate Income Tax (CIT) now have a provision that limits the utilization of tax losses in the event of a change in control, such that any carry forward tax losses will be lost if there is a change in ownership exceeding 50% of the entity.   However, tax losses can still be carried forward if there is a change in ownership, as long as the entity continues to operate the same business.     

Foreign tax credits

Taxpayers are allowed to reduce their CIT payment by deducting foreign taxes paid on income earned from foreign sources, as long as the taxes are similar to CIT and certain conditions are met.   The total foreign tax credit cannot be more than the amount of CIT that would have been paid in the UAE on the same foreign income.   Even if a Double Tax Treaty is not in effect with the country where the foreign tax is paid, taxpayers can still claim foreign tax credits under the domestic CIT regulations.   Unused foreign tax credits cannot be saved for future tax periods or applied to past tax periods.  

Conclusion

The CIT Law had already outlined the general framework for calculating taxable income, as explained in past guidance from the FTA. The new Guide offers practical examples and case studies to further clarify how UAE taxpayers can calculate their CIT.

All Guides published by the FTA aim to offer advice on how the CIT regime should be applied by UAE taxpayers.   However, they do not have legal authority and should be used alongside the CIT Law, Cabinet Decisions, and Ministerial Decisions for proper understanding and interpretation.    

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