Complete guide on income determination

Under the UAE CT Law, the accounting net profit (or loss) as stated in the standalone financial statements of a business is taken as the starting point for determining its taxable income. The law prescribes a number of key adjustments to the accounting net profit (or loss) in order to compute the taxable income.

The following table sets out the aspects to consider when determining the nature of a taxable person (i.e. resident vs. non-resident) as well as the applicable tax base:

Resident person	Tax base
An entity that is incorporated in the United Arab Emirates (including a Free Zone entity)	Worldwide income
A foreign entity that is effectively managed and controlled in the United Arab Emirates	Worldwide income
A natural person / individual who conducts a business or business activity in the United Arab Emirates	Worldwide income
Any other person (may be determined by a Cabinet decision)	Worldwide income
Non-resident person	Tax base
Has a PE in the United Arab Emirates	Taxable income attributable to the PE
Derives UAE-sourced income	The UAE-sourced income not attributable to the PE
Has nexus in the United Arab Emirates	Taxable income attributable to the nexus

Capital gains

There are no separate capital gains provisions under the UAE CT law. Any gains / (loss) on disposal of capital assets would form part of the taxable income, which would be subject to 0% or 9% tax rate as the case may be.

Unrealised gains or losses

Based on the CT Law and the FAQs, a taxable person that prepares financial statements on an accrual basis of accounting can opt for the following:

• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes (i.e. any and all unrealised gains would not be taxable [and conversely, any and all unrealised losses would not be deductible] until they are realised).
• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes for assets and liabilities held on capital account only (i.e. only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised). Unrealised gains and losses arising from assets and liabilities held on revenue account, on the other hand, would continue to be included in taxable income on a current basis.

Exempt Income

To avoid instances of double taxation, and recognising the United Arab Emirates’ position as an international business hub and leading holding company location, the UAE CT regime exempts dividends and other profit distributions received by a taxable person from a UAE tax resident entity (i.e. local dividends) or received from non-UAE tax resident persons, as well as other types of income as detailed below.

Participation exemption

Dividends and other profit distributions relating to ownership interest (referred to as a ‘participating interest’) in a foreign juridical person (referred to as ‘participation’) will be exempt from tax if:

• the ownership interest is at least 5%
• a 12-month uninterrupted holding period (or the intention to hold for 12 months) is in place

• the participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%, and
• not more than 50% of the assets directly or indirectly owned by the participation consist of an ownership interest or entitlements that would not qualify for the participation exemption if these assets were held directly by the taxable person.

The ‘subject to tax’ test would be satisfied if:

• A 9% effective tax rate (ETR) is applied on income or profits of the participation.
• In the event such a 9% ETR is not applicable based on the relevant jurisdiction’s tax regime, a 9% ETR is reached if re-calculated based on the provisions of the UAE CT Law.

Further, an entity could be treated as satisfying the condition that it must be subject to tax at a rate that is not lower than the UAE CT rate (i.e. at least 9%) if its principal business objective and activity is to acquire and hold shares or equitable interests that are considered as participating interests and the income of the participation during the relevant tax period substantially consists of income from participating interests. The tax rate requirement will also be treated as met where the juridical person is a QFZP or exempt person.

A participating interest of less than 5% could also qualify for the exemption where the acquisition cost of the ownership interest exceeds AED 4 million.

Foreign permanent establishment exemption

A resident person could create a PE in another jurisdiction based on the domestic tax laws of this jurisdiction, subject to any tax treaty. Generally, the income attributed to such a foreign PE will be taxed in that jurisdiction. In such a scenario, the UAE CT Law provides an option to the resident person to elect for an exemption of this income in the United Arab Emirates. The exemption will be available if the foreign PE is subject to CT or similar taxes at a rate not less than 9% in the foreign jurisdiction. If the resident person opts for this exemption, it will not be eligible to take into account losses, income, expenditure, and foreign tax credits in relation to the foreign PE in the United Arab Emirates.

International transportation exemption

Income earned by a non-resident from operating aircraft or ships in international transportation will not be subject to CT in the United Arab Emirates if the income earned by a UAE resident person that carries on these activities is exempt from CT in the jurisdiction of the non-resident.

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