Taxable Income under Corporate Tax in UAE

This blog delves into the specifics of taxable income under Corporate Tax, shedding light on the intricacies applicable to different entities and individuals.

Tax Base prescribes what is subjected to tax under a relevant tax law. For Corporate Tax in UAE, tax base is the Taxable Person’s Taxable Income. But then how is tax base decided. The taxable income is determined as follows:

• Resident Persons: This category of people is liable to pay corporate tax on income are both from inside and outside UAE.

• Non-Resident Persons: With a Permanent Establishment or a nexus in the UAE: Subject to corporate tax only on the income that is attributable to that Permanent Establishment.

• Without any Permanent Establishment or a nexus in the UAE but derives income from the UAE - such income would be subject to withholding tax at the rate of 0%.

• Natural Persons: Only Income from Business or Business Activity derived in UAE are subject to corporate tax. Any activity carried outside UAE, but if connected to business or business activity in UAE.

Taxable Income under Corporate Tax is determined from the accounting income prepared. Accounting prepared in accordance with the accepted accounting standards (IFRS / IFRS for SME’s – in case of taxable person with revenue of AED 50,000,000) after making necessary adjustments for the following:

• Unrealized Gains or Losses (where gains/losses arise without actual disposal or transfer of the related asset or liability)

• Exempt Income

• Deductions

• Reliefs for specific transaction types

• Transfer Pricing Adjustments

• Tax Losses

Taxable Persons can prepare Financial Statements using the Cash Basis of Accounting rather than the Accrual Basis of Accounting if their Revenue does not exceed AED 3,000,000 for the relevant Tax Period. Businesses may also be able to apply to the FTA to make use of the Cash Basis of Accounting rather than the Accrual Basis of Accounting in exceptional circumstances.

Among the many intricate elements of UAE Corporate Taxation, the determination of Taxable Income emerges as a pivotal element. The tax obligations for Resident Persons, Non-Resident Persons with or without a Permanent Establishment, and Natural Persons engaged in business activities are outlined with precision.

Furthermore, the computation of taxable income involves a meticulous process, considering various factors such as unrealized gains or losses, exemptions, deductions, and transfer pricing adjustments.

As we navigate through these complexities, it becomes obvious that understanding the Taxable Income under Corporate Tax is not only a necessity but also a strategic imperative for businesses and individuals alike.