In our previous article, we provided a broad overview of the latest Corporate Tax Guide (CTGDTI1) issued by the Federal Tax Authority (FTA) concerning the determination of taxable income. In this article, we will delve into some key takeaways from the guide that are particularly relevant.
Compensation for Connected Persons
The corporate tax law mandates that compensation for connected persons—such as owners, officers, and directors—must be at market value. Initially, we expected the FTA to provide salary brackets based on factors like industry, business type, and revenue. However, the guide clarifies that businesses must evaluate salaries paid to connected persons using the arm’s length principle. This means taxable entities will need to conduct benchmarking studies to ensure the compensation reflects fair market value.
Depreciation, Amortization, and Provisions
The guide confirms that accounting depreciation, amortization, depletion, and provisions are allowed for tax purposes. A key update is that if a provision is created before a person becomes taxable, any reversal of that provision after they become taxable will be subject to tax. For example, a provision made in 2023 but reversed in 2024 will be taxable in 2024. Additionally, provisions made for non-deductible items (e.g., provisions related to ongoing litigation from legal violations) will also be disallowed for tax purposes.
Fines and Penalties
Fines paid for legal violations, such as speeding tickets, are not deductible for corporate tax purposes. However, fines incurred as part of regular business operations, such as penalties for breach of contract, are allowable. This distinction is critical for ensuring that businesses properly account for penalties when calculating taxable income.
Interest Deductibility and Carryforward
For net interest expenses exceeding AED 12 million annually, a taxable person can claim either AED 12 million or 30% of EBITDA (whichever is greater). Any excess interest can be carried forward for up to ten years. It’s important to note that this carryforward will impact future EBITDA adjustments and will be included in the net interest for those periods. Interest expenses that fall outside these limitations are fully deductible and won’t count toward the AED 12 million threshold but will be added back when calculating adjusted EBITDA. The guide provides a detailed example of this application in Case Study 2.
Dividends and Gains Exemptions
Dividends received from resident juridical persons are exempt from tax without conditions. However, dividends from foreign juridical persons are exempt only if the participation exemption criteria are met. Additionally, capital gains, impairment gains, and foreign exchange gains are exempt from corporate tax when participation conditions are fulfilled. Otherwise, these gains will be subject to tax.
Loss Carryforward and Group Loss Transfers
Once the relevant requirements are met, losses can be carried forward indefinitely. Additionally, in a qualifying group, one taxable person may transfer its losses to another. However, when losses are carried forward or transferred, they can only be offset against up to 75% of the recipient’s taxable income or future taxable profits, leaving 25% subject to tax. The guide provides case studies demonstrating this rule. If the conditions for loss transfer or carryforward—such as group qualification or business continuity—are not met, further loss adjustments will be disallowed until the conditions are satisfied.
Pension Fund Contributions
Contributions to private pension funds are allowed up to 15% of an employee’s total remuneration for the relevant tax period. However, these contributions must be paid to be eligible for tax deduction. If the contribution remains unpaid, it will not be allowed, even if it falls within the 15% threshold.
Withholding and Foreign Tax Credits
The withholding tax credit takes precedence over the foreign tax credit, and the latter cannot exceed the corporate tax due on foreign-source income in the UAE. To claim a foreign tax credit, taxable persons must calculate their foreign income according to UAE tax rules, and foreign tax is determined using a weighted average approach as outlined in the guide.
Final Thoughts
The guide is comprehensive, with numerous case studies that clarify its application. I highly recommend reviewing it for a deeper understanding of corporate tax requirements and their practical implications.
