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Enhancing Taxable Income Calculation: Adjustments and Guidelines under UAE Corporate Tax Law

The UAE corporate tax law provides a set of adjustments and guidelines to be followed when determining taxable income in specific scenarios. This article highlights the provisions of corporate tax law regarding the calculation of income, its implications and its significance for businesses operating in the UAE.

Taxable Individual Conversion into the Qualifying Group

Transfers of assets or debts among taxable individuals who are a part of the same eligible group are governed by the corporate tax law. In some cases, the transferee’s estimate of taxable income may need to be carefully modified. These adjustments aim to exclude any depreciation, amortization, or changes in asset or liability values that relate to gains or losses recognized by the transferor but not yet recognized for tax purposes. Any unrecognized sum, with the exception of amounts originating prior to the most recent acquisition, must additionally be factored into the computation of taxable income upon realization of a liability or asset.  These adjustments provide clarity and ensure that taxable income accurately reflects the economic gains or losses realized by the transferee. By aligning the recognition of gains and losses with specific conditions, the decision promotes fairness and consistency in tax calculations within qualifying groups.

Read more: Tax Group Formation Under the UAE Corporate Tax Regime

Corporate Tax Restructuring of Businesses/Modifications 

The adjustments that must be made to the calculation of taxable income in the event that assets or liabilities are transferred from one taxable person to another, resulting in the transfer of the entire business or a separate portion of the business.  This provision requires excluding depreciation, amortization, or changes in asset or liability values related to gains or losses recognized by the transferor but not yet recognized for tax purposes. Any unrecognized sum, excluding amounts originating prior to the most recent purchase, must be taken into account in the calculation of taxable income upon realization of a liability or asset. These adjustments ensure that the taxable income of the transferee reflects the economic gains or losses derived from the business restructuring. By aligning the recognition of gains and losses with specific conditions, this provision facilitates accurate and consistent tax calculations in the context of business transfers.

Adjustments for Unincorporated Partnership Partners

The corporate tax law elaborates on how the partners in unincorporated partnerships are taxed. In such circumstances, income or losses acknowledged at the partnership level may be excluded from the partner’s taxable income by means of applications that have been accepted in line with section 8 of Article 16 of the Corporate Tax (CT) Law. Additionally, if certain requirements under section 2 of Article 23 of the Corporate Tax (CT) Law are satisfied, gains or losses from the transfer, sale, or dispose of the partner’s stake in the unregistered association or portion of it, may be excluded from taxable income. These adjustments provide relief for partners in unincorporated partnerships by allowing them to exclude partnership-level income or losses from their taxable income calculations. Additionally, it offers flexibility in recognizing gains or losses arising from the transfer of partnership interests, subject to meeting specified conditions.

Read more: How Will the UAE Corporate Tax Regime Apply to Partnerships?

Changes to Deductions

According to new Modifications to the deductions only expenses that qualify for a deduction and meet the criteria provided in the ninth chapter of the Corporate Tax (CT) Law are protected by the rules. Expenditures related to depreciation, amortization, or other changes in capital expenditures that would not have been deductible had they been non-capital in nature are not allowed as deductions. However, capital-related expenses that haven’t been taken into account for determining taxable income, with the exception of those that meet certain requirements, can be written off against gains or losses when the liability or asset in question is realized. Capital expenditures are determined using the accounting rules that a taxable individual has applied. These adjustments on deductions ensure the accuracy and fairness of taxable income calculations. By limiting deductions to eligible expenditures and excluding non-deductible capital-related expenses, the decision promotes consistency and transparency in the tax system.

Criteria for Choosing to Use the Realization Basis

The conditions for tax-paying enterprises to choose to employ the realization basis in recognizing gains and losses are set forth in Article 8 of the Ministerial Decision. Subject to the restrictions of Clause 2 of this article, entities that produce financial statements using the accrual method of accounting may elect to recognize profits and losses on a realization basis. Banks and insurance companies, who prepare their financial accounts on an accrual basis, are restricted to just realizing gains and losses. Except in exceptional situations and with authorization from the relevant authority, the choice of whether to make or not the election occurs during the first tax period and is regarded as final. These provisions provide flexibility for entities in aligning their tax recognition with the financial reporting basis they adopt. It allows for a consistent approach to recognizing gains and losses, ensuring accuracy and reliability in tax reporting.

Realization of an Asset or Liability

The decision outlying situations that are treated as a realization of either liabilities or assets for corporate tax purposes by clarifying that transfers between the taxable persons’ group, where Section 1 of Article 26 of the Corporate Tax (CT) Law applies, and transfers among taxable persons and other individuals, which, under Section 1 of Article 27, form transfers of an entire company or an independent part of an enterprise, are not regarded as realizations. On the other hand, the article clarifies that a realization of assets or liabilities includes various actions such as the sale, disposal, transfer, settlement, and complete worthlessness of an asset, as well as the settlement, assignment, transfer, and forgiveness of a liability, as per the accounting standards applied by the taxable person. These definitions provide guidance on determining when a realization of assets or liabilities occurs for tax purposes. It ensures consistency and uniformity in recognizing taxable events related to asset transfers, disposals, and liability settlements.

The scope of Corporate tax UAE is broadened by providing clear adjustments and guidelines for determining taxable income in specific scenarios. The provisions outlined address transfers within qualifying groups, business relief, adjustments for partners in unincorporated partnerships, deductions, the election of realization basis, and the realization of assets or liabilities. These adjustments and guidelines contribute to fairness, accuracy, and consistency in tax calculations, promoting a transparent and reliable tax system in the UAE.

Mostafa is a qualified Corporate Tax Consultant with over 5 years of experience gained in diverse intricate tax matters, he has high expertise in conducting tax negotiations and investigations with the Federal Tax Authority and other external Tax Bodies. He has vast experience in reviewing and drafting tax documents. Mostafa has also advised on a plethora of tax matters, he draws much attention to tax filing procedures and to offering professional investigations to underlining tax complexities. Read more