Determination of Taxable Income

Calculating Taxable Income is a two-step process:

  • The Taxable Person must first determine their Accounting Income. This will be based on Financial Statements prepared according to accounting standards recognised in the UAE (IFRS or IFRS for SMEs). Qualifying Free Zone Persons and any other Taxable Persons with revenue over AED 50 million must prepare and maintain audited Financial Statements.
  • The second step is to apply the relevant adjustments to the Accounting Income to arrive at the Taxable Income 239

Taxable Persons have to submit a Tax Return to the FTA within 9 months after the end of each Tax Period.240

The Tax Return is self-assessed, and Taxable Persons must provide their Accounting Income and details of any relevant adjustments, such as exemptions and reliefs claimed.

Calculation of Taxable Income

C LLC is a UAE resident company. At the end of its most recent Tax Period, its Financial Statements show an Accounting Income of AED 10,000,000. It has previously made an election to exempt its income from its Foreign Permanent Establishment in Country B. C LLC also has carried forward Tax Losses of AED 2,000,000.

Its Accounting Income for the most recent Tax Period includes the following items:

  • Dividends received from UAE Resident companies: AED 1,000,000;
  • Income from its Foreign Permanent Establishment in Country B: AED 1,500,000;
  • Net Interest Expenditure: AED 7,000,000; and
  • Entertainment expenditure: AED 500,000.

In order to determine its Taxable Income, C LLC must make the following adjustments to the Accounting Income in respect of these items:

  • Domestic dividends are Exempt Income for Corporate Tax As a result, the dividend income of AED 1,000,000 should be excluded from C LLC’s Accounting Income;
  • C LLC has made an election to exempt its income from its Foreign Permanent As a result, the income from its Permanent Establishment in Country B of AED 1,500,000 should also be excluded from C LLC’s Accounting Income (assuming the relevant conditions have been met);
  • Net Interest Expenditure is deductible in full as it is less than the de minimis Net Interest Expenditure of AED 12,000,000; and
  • Only 50% of entertainment expenditure is an allowable expense for Corporate Tax purposes. As a result, 50% of the expenditure (AED 500,000 x 50% = AED 250,000) must be added back to C LLC’s Accounting

  C LLC’s Taxable Income is therefore:

Accounting Income 10,000,000
Less: Domestic dividends (1,000,000)
Less: Foreign Permanent Establishment income (1,500,000)
Add: Interest expenditure 0

Add: Entertainment expenditure 250,000
Taxable Income 7,750,000
C LLC can use its carried forward Tax Losses to reduce its Taxable Income by up to
75% of its Taxable Income. As the amount of carried forward Tax Losses of AED
2,000,000 is less than 75% of its Taxable Income (AED 7,750,000 x 75% = AED
5,812,500), C LLC can use all of its available Tax Losses in this Tax Period.
C LLC’s final Taxable Income is therefore:
Taxable Income 7,750,000
Less: Tax Losses (2,000,000)
Final Taxable Income 5,750,000

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