06 October 2024
Josleen Deeb
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 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:
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:
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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