Under the UAE Corporate Tax Law, Taxable Income is determined starting from the Accounting Income which is the net profit or loss for the relevant period based on IFRS, IFRS for SMEs, or the Cash Basis of Accounting. Adjustments are then made to calculate the Taxable Income for Corporate Tax Purposes.

Taxable profits refer to the accounting profits after making certain adjustments. In general, the following income will be exempt from the income tax: dividend received by the UAE company from its qualifying shareholdings (as defined in the law) and capital gains.

Step- by Step Calculation Example:

The taxable income is AED 500,000 (1,000,000-500,000). Since the tax-free threshold is AED 375,000, the taxable amount becomes AED 125,000 (500,000- 375,000). The corporate tax due is calculated at 9% of AED 125,000, resulting in a tax liability of AED 11,250.

Adjustments

The following adjustments should be taken into account when determining Person’s Taxable Income from their Accounting Income.

• Unrealized gains or losses– Assets and liabilities may be change in value without transactions, leading to unrealized gains or losses. Taxable Persons must include both realized and unrealized gains or losses from their Financial Statements in calculating Taxable Income, unless they choose the realization basis which only included realized gains and losses. Gains or losses not recognized in the income statement, but reflected in other comprehensive income, must also considered Exempt Income.
• Exempt Income – the UAE Corporate Tax regime provided income exemptions to either: Exempt income from ownership interests in another entity or a Foreign Permanent Establishment, provided it has already been taxed, or align the UAE’s tax treatment with international standards, particularly for international transportation. In general, these exemptions are symmetrical, meaning expenses incurred to generate Exempt Income cannot be deducted for Corporate Tax purposes, unless otherwise specified.
• Deductions- Deductible and non- deductible expenditure.

Accounting Income is calculated by subtracting normal business expenses from the revenue earned during the same Tax Period. However, not all expenses recognized under the general accounting rules are deductible for Corporate Tax purposes. Non- deductible expenses must be added back to Accounting Income when determining Taxable Income.

To be deductible, expenses must be incurred wholly and exclusively for the business an must not be capital in nature. This condition applies to all deductible expenses. Expenditure is deductible in the Tax Period it is incurred, subject to Corporate Tax Law.

No deductions are allowed for expenses not incurred for business purposes, expenses related to exempt income and losses to the business.

• Entertainment Expenditure- costs incurred for entertaining customers, shareholders, or ither partners often include a private element, making them partially deductible. To simplify, a 50%

deduction is allowed for all entertainment expenditure for Corporate Tax purposes. This includes costs related to meals, accommodation, transportation admission fees, and associated facilities. If the expenditure includes personal costs, only 50% of the business-related portion is deductible.

• Reliefs for specific transaction types
• Transfer pricing adjustments for transactions between Related Parties or Connected Persons
• Tax Losses

• Donations, grants, or gifts made to organization that are not Qualifying Public Benefits Entities.
  • Zakat payments, which are only deductible if made to Qualifying Public Benefit Entity.
• Bribes and Illicit payment– bribes or illicit payments are non-deductible even recorded as a business expense. For example, a payment of AED 2,000,000 to influence customer’s employee is considered a bribe and must be added back when calculating Taxable income.
• Fines and penalties and compensation– payment for infractions, breaches of laws, or penalties imposed as punishment are not deductible for Corporate Tax purposes, even if incurred in the normal course of business. This includes fines and penalties levied by statutory bodies or governments.
• Payments to Connected Persons – payments to connected persons, such as owners or directors, are only deductible if they reflect the Market Value of service or benefit provided.
• Input Value Added Tax -Input Value Added Tax (VAT) on expenditure that is not deductible for CT purposes is also non- deductible. For example, VAT on personal (non-business) expenses cannot be deducted.
• Contribution to private pension fund – an employer can claim a deduction for contributions to a private pension fund for employees who are Pension Plan Members, but only if the contributors are” paid” in the relevant of the tax Period and do not exceed 15% of the employee’s total remuneration. Unpaid contributions and those exceeding the 15% limit are not deductible.
• Expenses incurred prior to commencement of Business- generally, any expenditure incurred wholly and exclusively for the business is deductible in the Tax Period in which it is incurred m subject to specific restrictions.
• Creation and reversal of provisions – no adjustments is required when determining Taxable Income for provision for bad debts of AED 500,000 and provision for customer warranties of AED 600,000 (related to the sale of medical equipment).

Further details on each of these adjustments are provided below.

Additional adjustments may be necessary specific situations, such as when calculating Taxable Income in relation to:

• Transfer within Qualifying Group
  • Claiming business restructuring relief, and
  • A partner in an Unincorporated Partnership

What is Final Tax Liability?

Final Tax Liability refers to the total amount of tax a business or individuals is required to pay after accounting for all taxable income, allowable deductions, exemptions, tax credits, and applying relevant tax rate. It is the amount due to the tax authorities at the end of a tax period, representing the business’s or individual’s final tax obligation after adjustments.

How MACKA can help?

As a certified Auditor and Tax agent we can help you determine Taxable Income under UAE Corporate Tax Law by:

• Identifying deductible expenses and ensuring compliance
• Adjusting accounting income for necessary adjustments
• Offering tax planning advice and maximizing exemptions
• Ensuring proper documentation and compliance with reporting requirements
• Handling complex cases like transfer pricing and group relief
• Managing Corporate Tax on deductible and non-deductible expenses
• Assisting with Corporate Tax filing and dispute resolution to ensure compliance.

Frequently Asked Questions