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Understanding Taxable Income in the UAE — Taxable Income is a crucial concept in determining the tax liability of businesses. In the United Arab Emirates (UAE), taxable income is derived from the accounting net profit or loss, with certain adjustments as defined by the Corporate Tax Law. In this blog post, we will explore the components of taxable income, the adjustments required, and the principles governing its determination, shedding light on how businesses can navigate the complexities of taxation.
Preparing Financial Statements and Accrual Basis:
Financial statements of UAE entities and other businesses should be prepared in accordance with accounting standards accepted in the UAE, with International Financial Reporting Standards (IFRS) being the commonly used standard. Taxpayers are generally required to prepare their financial statements and determine their taxable income on an accrual basis, unless they are permitted to use the cash basis of accounting.
Adjustments to Financial Statements:
To arrive at taxable income, the accounting net profit or loss needs to be adjusted for specific items. These adjustments include:
- Unrealized gains/losses: Unrealized gains and losses are not immediately taxable or deductible and are recognized only when realized.
- Exempt income: Certain types of income, such as dividends, may be exempt from taxation.
- Intra-group transfers: Transfers within a group of related entities may require adjustments for tax purposes.
- Non-allowable deductions: Some deductions claimed in financial statements may not be allowable for tax purposes.
- Related party and connected person transactions: Transactions with related parties and connected persons may require adjustments to ensure arm’s length pricing.
- Incentives and tax reliefs: Taxpayers may be eligible for specific incentives or reliefs that impact taxable income.
- Minister-specified adjustments: The Minister may specify additional adjustments as required.
Treatment of Unrealized Gains and Losses:
When preparing financial statements on an accrual basis, businesses have options for treating unrealized gains and losses:
Option 1: Realization basis for all assets and liabilities. Unrealized gains and losses would not be taxable or deductible until they are realized.
Option 2: Realization basis for capital assets only. Only unrealized gains and losses related to capital assets would not be taxable or deductible until they are realized.
The Realization Principle:
The UAE follows the realization principle for determining taxable income. According to this principle, income is taxable and deductions can be taken only when a gain or loss is realized. Realization occurs when the relevant asset is sold or terminated. Under the realization principle, gains and losses from assets subject to fair value or impairment accounting are excluded from taxable income for each tax period.
Capital Gains:
In the UAE, there is no distinction between gains arising from the sale of capital assets and those arising from the sale of non-capital (revenue) assets. Capital gains derived from the disposal of assets are included in annual taxable income similar to other income from the business. However, capital gains on the sale of shares may be exempt from corporate income tax, subject to meeting specific conditions.
Conclusion:
Understanding taxable income is crucial for businesses to comply with tax regulations and determine their tax liability. The adjustments made to accounting net profit or loss, along with the principles governing the recognition of unrealized gains and losses, play a significant role in arriving at taxable income. By navigating these complexities effectively, businesses can ensure compliance and optimize their tax positions within the UAE’s tax framework.
Registered Tax Agency and Agents
Tax Agency Registration Name: PARKER RUSSELL OBAID AUDITING
Tax Agency Registration Number: 30000269
Tax Agent Registration Name: Mansour Abdulwahab Mohamed Ahmed
Tax Agent Registration Number: 20037867
To speak with our corporate tax expert kindly email us at: infodubai@pr-uae.com or sales@pr-uae.com