UAE Corporate Income Tax: Considerations beyond tax

As per CIT Law, the Taxable income of each taxable person is determined on the basis of standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE, like IFRS. The taxable income for a tax period is the accounting income for that period, and to the extent applicable, adjusted for the items as specified in Article 20 of the CIT Law (E.g. unrealized gain or loss, exempt income, reliefs, deductions etc.).

The general rule for CIT purposes is that the treatment in the financial statements applies, unless there is a specific rule in the CIT Law or its implementation regulations that prescribes a different treatment.

Under IFRS, DTA shall be recognised on the carry forward of unused tax losses and tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and tax credits can be utilised. Article 37 of the CIT law currently prescribes the limit of 75% for tax loss relief available against taxable income of the particular year and Article 39 provides the conditions for carry forward of tax losses. The CIT law does not prescribe a time limit for the carry forward of the tax losses.

As per IFRS, in the consolidated financial statements, the identifiable assets acquired and the liabilities assumed as part of a business combination are measured at fair value on the date of acquisition . However, as per CIT Law, in case the entity is not opting to form a tax group, the tax base of assets/ liabilities of the acquired subsidiary will be based on the values in acquiree’s separate financial statements.

These fair value or Purchase Price Allocation (PPA) adjustments give rise to deferred tax implications requiring recognition of DTA/ DTL in the consolidated financials of the acquirer.

While the CIT law does not provide specific guidance on business combinations, there are certain reliefs available for business restructuring and transfers within a qualifying group whereby no gain or loss needs to be taken into account in determining taxable income.

Under IFRS, intra-group transactions are eliminated on consolidation. Intra- group transaction affects the recognition, measurement and presentation of deferred tax in the consolidation financial statements, mainly due to the effect on tax base and tax rate for the respective assets or liabilities.

The CIT Law also requires elimination of transactions between the Parent and each Subsidiary that is a member of the same tax Group for the purposes of determining the taxable income of the tax group.

Interest cost under IFRS is generally recognised in profit and loss, based on Effective Interest Rate Method, unless capitalization criteria of IAS 23,

Borrowing costs are met. The CIT Law provides that the interest expenditure shall be deductible in the tax period in which it is incurred, subject to specified conditions. Further, net interest expenditure shall be deductible up to 30% of EBITDA (excluding any specified exempt income). The amount of net interest expenditure disallowed in this respect may be carried forward and deducted in the subsequent ten tax periods in the order in which the amount was incurred.

Basis the CIT law read with the relevant ministerial decision No. 126 of 2023, payments economically equivalent to Interest shall be considered interest expenditure or income for the purposes of the general interest deduction limitation rule, regardless of the classification and treatment of the interest component under the applicable accounting standards unless stated otherwise.

The concept of tax group has been introduced by the CIT Law under Article 40, whereby multiple resident persons can apply to act as one taxable person, represented by the parent company. For the purposes of determining the taxable income of a tax group, the parent company shall consolidate the financial results, assets and liabilities of each subsidiary for the relevant tax period, eliminating transactions between the members of the same tax group.

There is no such concept of tax group under IFRS. Accordingly impact for any differences between tax and accounting will require consideration. Also refer point 4. Intra group transactions.

Article 38 of the CIT Law allows tax losses to be transferred between the resident persons with a common ownership of at least 75%, subject to prescribed conditions.

In case if the entities opt to avail the benefit of such transfer within the group, it will result in accounting implication of derecognizing the DTA in the books of transferor and recognizing the DTA in the books of the transferee.

As per IFRS, a provision is a liability of uncertain timing or amount and measured at its best estimate. Further, accruals are liabilities to pay for goods or services that have been received or supplied but not yet paid for or invoiced.

Article 28 explains the nature of expenses that are deductible under CIT law. As per Article 28, the expenditure incurred wholly and exclusively for the purposes of the taxable person’s business, that is not capital in nature, shall

be deductible in the tax period in which it is incurred, subject to the specified provisions. The expenditure is incurred when the obligation to pay arises i.e. when it is irrevocably committed for payment.

Because of the differences in terminology between CIT laws and IFRS, adjustments may be required for taxable profit calculations. Therefore, management should evaluate whether the provisions or accruals under IFRS meet the definition of ‘incurred expenditure’ as per CIT law. If provisions and accruals do not meet the requirements of CIT law from a deductibility

perspective, then the temporary differences will arise requiring recognition of deferred taxes.

Some of the provisions that may need evaluation and assessment include provision for :

• End of service benefits
• Employee stock options plan (ESOP)
• Legal cases