Chapter Six – Calculating Taxable Income

The chapter six of the Federal Decree Law No. 47 of 2022 and deals with rules and regulations for determining taxable income, and small business relief. This provides a clear computation for calculating taxable income and reduces complexity in corporate tax filing. 

Article 20 – General Rules for Determining Taxable Income

1. Separate Financial Reporting for Each Taxable Person

The Taxable Person should determine their taxable income individually, on the basis of adequate, standalone financial statements prepared for financial reporting using accepted accounting standards (such as IFRS) in the UAE .

2. Taxable Income 

The Taxable Income for a particular Tax Period will be based on the business’s accounting Income during that period, and it can be adjusted for various items such as:

(a) Unrealised Gains or Losses – Special tax treatment is applicable for items like modifications in asset value not yet realised in cash.

(b) Exempt Income – Certain income types such as dividends or foreign branch profits are excluded for determining corporate tax.

(c) Reliefs – Accounting income can be adjusted for tax reliefs like participation exemption or restructuring relief.

(d) Deductions – Allowable business expenses and costs that can be adjusted.

(e) Related Party Transactions – Transactions with related parties or connected persons can be adjusted to ensure fair value.

(f) Tax Loss Relief – Tax losses of previous tax periods can be used to offset the current income (with limitations).

(g) Incentives Offered By The Cabinet – Any other incentives or reliefs specified in the Cabinet Decision.

(h) Other Unaccounted Items – Any income or expenses not included under the Federal Decree Law but specified in the future Cabinet decisions.

(i) Ministerial Adjustments – Any other adjustments the Minister may prescribe later.

3. Accrual vs. Realisation Basis 

To calculate the Taxable Income for the particular tax period, a Taxable Person must prepare financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis in relation to: 

Taxable Persons that does accounting on an accrual basis may choose to tax certain gains/losses only when realised, but this is applicable only to:

(a) All assets subject to fair value or impairment accounting under the accepted standards in UAE.

(b) All assets and liabilities held on capital account at the end of the tax period, while still including unrealised gains/losses that arise in assets and liabilities held on the revenue account items at the end of tax period.

Assets and liabilities held on capital account refers to long-term assets (not traded), like buildings, equipment, or patents.

Liabilities held on capital account  refers to liabilities incurred which do not give rise to deductible expenditure, or liabilities treated under relevant accounting standards as non-current liabilities.

Liabilities on Revenue Account:  Refers to everyday business assets and liabilities such as stock, and  trade payables.

Unrealised Gain/Loss: Refers to gain or loss which has not yet turned into cash, including unrealised foreign exchanges.

5. The Ministerial may suggest the following provisions for accounting taxable income:

The Minister may suggest:

When a business can utilize cash basis accounting.

The allowable adjustments to accounting standards for corporate tax purposes.

Different tax basis for calculating taxable income for a Qualifying Business Activity.

6. A business may apply to the authority to shift from cash basis to accrual basis, either from the start of the current tax period or from the beginning of the future tax period.

7. In case of any conflict between the corporate tax law and the applicable accounting standards, the Corporate tax law takes precedence.

Article 21 – Small Business Relief

The small business relief is a provision for small businesses to be exempt from corporate tax

1. Small Business Relief Eligiblity

A taxable person who is a resident business in the UAE could be opt out from corporate taxation for the relevant tax period under the small business relief if:

(a) The generated revenue is below the threshold set by the Minister (e.g., AED 3 million as per the corporate tax law).

(b) It also satisfies all other conditions set by the Minister (e.g., not operating under a multinational group).

If the election is made, the business is treated as if it had no taxable income for that period.

2. Provisions That Do Not Apply

If a business has to claim Small Business Relief, it should not be able to use or apply the following tax benefits for the Tax Period:

(a) Exempt Income (Chapter Seven of The Decree-Law)

(b) Other Reliefs ( Chapter Eight of The Decree-Law)

(c) Deductions (Chapter Nine of The Decree-Law)

(d) Tax Loss Relief (Chapter Eleven of this Decree-Law)

(e) Article 55 (final provisions for tax calculations)

 3. The authority may request any supporting documents or information to verify the eligibility and set deadlines for the submission of such records/documents.

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