Essentials of Taxable Income and Exempt Income in the UAE Corporate Tax Landscape

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Taxable income refers to the total income after reducing the deductions, allowances, and other deductibles, on the other hand, exempt income is the earning on which no tax is required to pay. The UAE Corporate taxation landscape has undergone a significant transformation with the implementation of the new Corporate Tax regime. In this article, Tax Consultant Dubai delve into the fundamental concepts of taxable income, exempt income, and the taxation of non-resident entities within this framework.

How To Calculate the Taxable Income: An In-depth Exploration

The cornerstone of the Corporate Tax framework is undoubtedly the concept of taxable income. As delineated in Article 20 of the Federal Decree-Law No. 47 of 2022 (FDL 47/2022), the computation of taxable income comprises a multifaceted array of components. The salient aspects encompassed are:

  • Realized Gains and Losses: The crux of taxable income entails a meticulous consideration of any gain or loss realized in the context of assets and liabilities.

  • Exempt Income, Reliefs, and Deductions: The assessment takes into meticulous account any income that is exempted, reliefs, deductions, and their interplay with other elements.

  • Related Party and Connected Person Transactions: Transactions with related parties and connected persons are factored in.

  • Tax Loss Relief: The new regime seamlessly integrates provisions for tax loss relief, crucial for businesses financial stability.

  • Incentives and Special Reliefs: The regime provides for the application of incentives and special reliefs tailored to qualifying business activities, bolstering economic growth.

  • Other Income, Expenditure, and Adjustments: The panoramic view of taxable income encapsulates other diverse sources of income, varied expenditures, and the indispensable role of adjustments.

Exempt Income: Profits and Gains

Exempt income plays a pivotal role in the new Corporate Tax landscape. The salient aspects encompassed are:

  • Dividends, Profit Distributions, and Gains from Disposal of Shares: The contours of exempt income embrace dividends, profit distributions, and the gains emanating from the disposal of shares or analogous ownership stakes, emanating from resident juridical entities.

  • Participating Interest in Foreign Juridical Entities: For income to qualify as exempt via participating interest in foreign juridical entities, stipulated criteria are indispensable. A minimum ownership of 5% in shares or capital for a duration of no less than 12 months, coupled with adherence to prescribed profit distribution standards, constitutes the fulcrum.

  • Ownership Interest of Permanent Establishments of Non-Resident Entities: Exempt income also extends its beneficence to income garnered from the ownership interest of permanent establishments of non-resident entities, subject to the fulfillment of conditions articulated in Article 23.

Taxation of Non-Resident Juridical and Natural Entities:

A significant strand of the new Corporate Tax pertains to the taxation nuances enveloping non-resident entities:

  • Taxation of UAE-Sourced Income: Non-resident juridical and natural entities, housing UAE-sourced income in their coffers, come under the taxation ambit. Plausible eligibility for foreign tax credits in jurisdictions where similar income attracts equal or higher tax rates further accentuates this dimension.

  • Exploring the Horizons of State-Sourced Income: The sphere of state-sourced income, a critical facet, includes income emanating from resident or non-resident entities rooted in activities enmeshed with permanent establishments in the UAE.

Permanent Establishment: Crafting a Nexus:-

In the context of non-resident entities, the bedrock is undoubtedly the notion of a permanent establishment:

  • Defining Permanent Establishment: The contours of Article 14 of FDL 47/2022 intricately elucidate the dimensions of a permanent establishment for non-resident entities. This encapsulates a space where the business or segments thereof of a non-resident entity is conducted, in addition to instances wherein a person conducts a business on behalf of the non-resident entity habitually. The Cabinet Decision No. 56 of 2023 further elucidates the nexus within the UAE that substantiates the permanence.

  • Obligations of Registration and Record-Keeping: Essential obligations bind non-resident entities. This encompasses registration with the tax authority to procure a tax registration number, the declaration of tax as per stipulated norms, and the onus of maintaining financial accounts and records for a duration of 7 years, ensuring easy accessibility of data by the tax authority.

Taxation On State-Sourced Income

The vistas of state-sourced income resonate with significance, encompassing intricate elements:

  • Taxation of State-Sourced Income: Non-resident entities with UAE-sourced income are subject to taxation on this spectrum. It encompasses earnings arising from resident entities, intertwined with the permanent establishment of the non-resident entity.

  • Exhausting State-Sourced Income Paradigm: The comprehensive scope of state-sourced income finds articulation in Article 13(2) of FDL 47/2022. This segment expounds on a non-exhaustive catalog of income and expenditure that seamlessly dovetails with the non-resident taxable entities' purview.

Small Business Relief: Opportunities for Resident Taxable Entities

A pivotal feature of the new Corporate Tax paradigm is the groundbreaking provision of Small Business Relief. Within the precincts of this provision, a resident taxable entity, excluding Qualifying Free Zone Persons (QFZPs) and multinational enterprise groups, can opt to be treated as having not derived any taxable income if their total revenue does not surpass AED 3 million. This choice is applicable to specific tax periods commencing from 1 June 2023 and culminating by 31 December 2026. It's paramount to underline that embracing this option comes at the cost of forfeiting the right to carry forward tax losses and net interests, in accordance with Article 21 of FDL 47/2022.

        In conclusion, it is aptly to say that the new Corporate Tax regime in the UAE has brought about a paradigm shift in the country's taxation landscape. It is imperative for businesses, whether resident or non-resident, to grasp the intricacies of taxable and exempt income, as well as the provisions governing non-resident entities. This understanding not only ensures compliance with the law but also maximizes the benefits offered by the new tax framework.




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