Taxable Income in UAE

Frequently Asked Questions

Taxable income refers to the net profit or loss of a business after making certain adjustments, as defined in the Corporate Tax Law, for a specific Tax Period.

Financial statements for UAE organizations and other enterprises must be prepared using local accounting standards to comply with UAE CT requirements. The most commonly used accounting standard in UAE is the International Financial Reporting Standards (IFRS).

Unless authorized to use the cash basis, taxpayers are expected to prepare their financial statements and determine their taxable income on an accrual basis. The Minister may authorize financial statements to be prepared on a cash basis in certain situations, such as for individual entrepreneurs or small businesses.

The elements listed in the UAE Corporate Tax Law would need to be taken into account when adjusting the accounting net profit (or loss), including:

  • Unrealized gains or losses (depending on the decision made regarding the application of the realization principle)
  • Exempt income, such as dividends
  • Intra-group transfers
  • Tax-related deductions that aren’t allowed
  • transaction adjustments with related parties and connected persons,
  • Incentives or tax relief
  • Any additional adjustments directed by the Minister.

For businesses that prepare financial statements on an accrual basis, there are two options for the treatment of unrealized accounting gains and losses:

  • The taxpayer can choose to recognize gains and losses on a “realization basis” for all assets and liabilities. It means that unrealized gains will not be taxable and unrealized losses will not be deductible until they are realized.
  • The taxpayer can recognize gains and losses on a “realization basis” for assets and liabilities in the capital account. It means that unrealized gains and losses related to assets and liabilities held on capital accounts will not be taxable or deductible until they are realized. However, unrealized gains and losses related to assets and liabilities held in the revenue account will continue to be included in taxable income on a current basis.

Assets and liabilities held on capital accounts are those that are not expected to be sold or traded during the normal course of business operations.

  • The UAE CT scheme permits taxpayers to use the realization principle to calculate their taxable income, much like many other corporate tax systems do. As a result, income will only be subject to taxation and be eligible for a deduction if a gain or loss is realized. Realization could take place, for instance, when the relevant asset is sold or terminated.
  • According to the realization principle, taxable income for each Tax Period would exempt gains and losses on assets or liabilities that are subject to fair value or impairment accounting.

Gains from sales of capital assets and non-capital (revenue) assets are not distinguished from one another. In the same way, as other company revenue, capital gains from asset sales are included in taxable income annually. Subject to fulfilling specific requirements, capital gains on the sale of shares may be excluded from corporate income tax. (See the section under “Income exempt from CT” and the question “Are capital gains exempt from UAE CT?”).

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