UAE Corporate Income Tax :

Considerations beyond tax

JUNE 2023

Introduction:
The Federal Tax Authority has issued the Federal Decree Law No. 47 of 2022 on “Taxation of Corporations and Business” (the
“CIT Law”) which levies a form of direct tax on corporations and business profits from the beginning of their first financial year
commencing on or after 1 June 2023. E.g. The first tax period will commence from 1 January 2024 for the companies that follow
January to December as their financial year.

The Corporate Income Tax (“CIT”) Law read with the Cabinet Decision No. 116 of 2022 provides that taxable person’s taxable income
exceeding AED 375,000 shall be subject to 9% CIT rate in the relevant tax period. In case of a qualifying free zone person, qualifying
income will be taxed at 0% and taxable income other than qualifying income will be taxed at 9 %.

This publication aims to assist companies as they evaluate the CIT Law impact on their businesses and highlights crucial aspects
to be considered for a holistic CIT impact assessment across areas beyond tax accounting and reporting, IT systems, people,
processes and wider business.

Key milestones and features

Synopsis of accounting under IFRS
Key impact areas beyond tax
Key milestones and features
Introduction of CIT CIT Law published in Threshold of taxable Income
law by UAE Ministry of the Official Gazette for levying tax published in
Finance (MOF) (effective after 15 days) the Official Gazette
31 January 2022 10 October 2022 16 January 2023

MOF published the full CIT Law to apply to Tax

Public consultation
translated text of the Periods commencing
document issued
CIT Law on its website on or after 1 June 2023
28 April 2022 9 December 2022 1 June 2023

Definition of exempt person & taxable person Exempt income

Categories of persons who shall be exempt from CIT are spec- Specified income and related expenditure shall not be
ified and include government entity; government-controlled taken into account in determining the taxable income
entity, person engaged in an extractive business that meets including dividends and other profit distributions received
the specified conditions. from a juridical person that is a resident person or from a
participating interest in a foreign juridical person as specified.
Taxable person shall be either a resident person or a non-resi-
dent Person and the conditions for each are further specified. Conditions for participation exemption

Concept of qualifying free zone person Income from a participating interest (including dividends and
other profit distribution from a foreign participation) is exempt
Free zone person is required to meet specified conditions from corporate tax, subject to specified conditions.
including:
• Maintaining adequate substance in the UAE
• Deriving qualifying income as specified
Reliefs for transfers within a qualifying group &
• Not elected to be subject to corporate tax business restructuring
The CIT law provides for corporate tax neutrality where (i) one
Rules for calculating taxable income or more assets or liabilities are transferred between closely
related taxable persons, defined as members of a qualifying
General rules for determining taxable income specified
group and (ii) certain transactions undertaken as part of the
including adjustments to be made to the accounting income
restructuring or reorganization of a business.
for any unrealized gain or loss, exempt income, specified
reliefs, deductions, transactions with related parties and
connected persons, tax loss relief, etc. Deductible and non-deductible expenditures
Chapter 9 specifies expenditure fully deductible, partially
Availability of small business relief deductible (interest and entertainment expenditure) and non-
deductible (specified donations, grants or gifts, bribes etc.).
A taxable resident person may elect to avail this relief subject
to specified conditions being met, including revenue of the tax
period and previous tax periods not exceeding AED 3,000,000 Tax loss relief, conditions for transfer of tax loss
for each tax period. & limitation on carry forward of tax losses

Principles of arm’s length & transfer pricing The CIT law allows tax losses incurred in one tax period to be
offset against the taxable income of a subsequent tax period
documentation under certain conditions and up to 75% of the taxable income
for that tax period. No definite time period has been specified
In determining taxable income, transactions and
in respect of carry forward of tax losses.
arrangements between related parties to meet the specified
Tax losses may also be transferred between resident persons
arm’s length standards. The authority may require a taxable
with a common ownership of at least 75% and subject to
person to file together with their tax return a disclosure
meeting the prescribed conditions.
containing information regarding the taxable person’s
transactions and arrangements with its related parties and
connected persons.
 Transitional rules Tax Groups and manner of determining taxable
A taxable person’s opening balance sheet for corporate tax income of tax group
purposes shall be the closing balance sheet prepared for
Tax group with one or more other resident persons may be
financial reporting purposes under accounting standards
formed subject to meeting prescribed conditions (including
applied, subject to prescribed conditions or adjustments.
“Parent Company” to hold at least 95% of share capital
and voting rights of a subsidiary, either directly or indirectly
through one or more subsidiaries).

Anti- abuse rule

The authority is permitted to counteract transactions or arrangements for corporate tax purposes where it can be reasonably
concluded that there is not a valid commercial or other non-fiscal reason which reflects economic reality for the transaction
and one of the main purposes is to secure a corporate tax advantage (including refund or an increased refund of corporate
tax; avoidance or reduction of corporate tax payable) that is not consistent with the purpose of the CIT Law.

Synopsis of accounting under IFRS

Accounting for CIT under International Financial Reporting tax consequences of the future recovery or settlement of the
Standards (IFRS) requires application of IAS 12 Income Taxes. carrying amount of an entity’s assets and liabilities. In simpler
IAS 12 implements a ‘comprehensive balance sheet method’ of terms, Income taxes, as defined in IAS 12, include current tax
accounting for income taxes which recognises both the current and deferred tax. The following table explains the stepped
tax consequences of transactions and events and the future approach in accounting for CIT under IAS 12.

Key principles of accounting for

Examples
Income Taxes under IAS 12

Step 1: Determine if a levy is in scope of IAS 12 Applies to Taxes payables on capital and reserves; social security taxes
taxes based on taxable profits and taxes that are payable by payable by the employer (in the nature of employee benefits)
a subsidiary, associate or joint arrangement on distribution are not a levy in scope of IAS 12
to reporting entity.

Taxable income for Company A for FY 20XX (Amount in AED)

Step 2: Recognise and measure the current tax 475,000
Corporate tax rate = 9%
It is the amount of income taxes payable (recoverable) in
Considering the threshold as per CIT Law,
respect of the taxable profit (loss) for a period. 9,000
current tax = 9% * (475,000–375,000)

Step 3: Recognise and measure the Deferred tax Tax base of liability 19,800
Calculate the tax base: Carrying amount of loan payable (net of
The tax base of an asset or liability is the amount attributed issue cost of AED 200)
to that asset or liability for tax purposes The issue cost of AED 200 has been allowed
for tax purposes in the year of inception of
Calculation of temporary differences, unused tax losses and loan.
credits: DTL = 9%(tax rate) * (19,800-20,000) 18
Temporary differences are the differences between the
carrying amount of an asset or liability in the statement
of financial position and its tax bases and can either be a Tax base of asset
taxable or deductible temporary difference. Carrying amount of property, plant and 9,500
equipment (PPE) after recording impairment
Recognition and Measurement of Deferred tax asset(DTA) and loss of AED 500. The impairment loss has no
DTL (Deferred tax liability): effect on tax base of PPE (as opted by the
Apply tax rates that are expected to apply in the period in Company under Article 20 of the CIT Law)
which the asset is realized or the liability is settled, based on DTA = 9%(tax rate) * (9,500-10,000) 45
tax rates that have been enacted or substantively enacted
by the end of the reporting period.

Step 4: Determine where to recognise income tax Carrying amount of property, plant and 120,000
Current and deferred tax is recognized as income or expense equipment (including revaluation gain of
and included in profit or loss for the period unless the 20,000 recognized in OCI)
transactions or events are recognized outside of profit or loss Revaluation gains are taxable on realization
in other comprehensive income (OCI) or equity. In such case, (as opted by the Company under Article 20
the related tax amount is also recognised outside of profit or of the CIT Law)
loss in OCI / directly in Equity. Deferred tax liability on the same will be
recognized in OCI.
Key principles of accounting for
Examples
Income Taxes under IAS 12
Step 5 : Disclosures Reconciliation of effective tax rate
20XX 20XX
The key disclosures under IAS 12 include:
In thousands of AED

major components of tax expense (tax income) including (a) Profit before tax from continuing operations XX XX
current tax expense (income) (b) any adjustments to current Tax using the Company’s domestic tax rate xx% xx xx% xx
taxes of prior periods recognised in the period
Effects of tax rates in foreign jurisdictions (xx%) (xx) (xx%) (xx)

Reduction in tax rate (xx%) (xx) (xx%) (xx)

Reconciliation between the applicable statutory tax rate and
the entity’s effective tax rate Tax effect of :

-Share of profit of equity accounted investees reported (xx%) (xx) (xx%) (xx)
, net of tax

-Non-deductible expenses xx% xx xx% xx

-Tax exempt income (xx%) (xx) (xx%) (xx)

-Tax incentives (xx%) (xx) (xx%) (xx)

-Current year losses for which no deferred tax asset is xx% xx xx% xx
recognised

Recognition of previously unrecognised tax losses (xx%) (xx) (xx%) (xx)

Recognition of previously unrecognised (derecogni- (xx%) (xx) (xx%) (xx)

tion of previously recognised) deductible temporary
differences

Changes in estimates related to prior years xx% xx xx% xx

xx% xx xx% xx

Key impact areas beyond tax

While many companies in the UAE have begun assessing the impact of the CIT law on their businesses from tax calculation and
administration stand-point, not many of them have considered impacts beyond tax. In order to ensure effective implementation
of CIT law, the taxable person will need to consider and address the wider implications of CIT, including the impact on accounting
and reporting, IT systems, finance and tax processes, governance , people and wider business.

Accounting and
Reporting
OUNTING &
ACC
REPORTING As per CIT Law, the Taxable income of each
taxable person is determined on the basis of
M

standalone financial statements

ST E

prepared for financial reporting purposes

in accordance with accounting standards
I T SY
BUSINESS

accepted in the UAE, like IFRS. The taxable

income for a tax period is the accounting
CIT IMPACT 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.).

G
E
PL

The general rule for CIT purposes is that

O O
VE PE the treatment in the financial statements
RN applies, unless there is a specific rule in the
ANCE CIT Law or its implementation regulations that
prescribes a different treatment.
In this section we have included certain key impact areas in respect of deferred taxes and other matters of accounting and
reporting.

1. Election choice under Article 20

Under IFRS, gains/losses could get recognized on account of fair value adjustments or impairment where there has been no
actual disposal or settlement (i.e. realisation) of the relevant asset or liability, and therefore no receipts that could be used to pay
any CIT liability that may arise as a result.

As per Article 20(3) of the CIT Law, where a taxable person prepares financial statements on an accrual basis and has elected to
take into account gains / losses on a realisation basis, the potential adjustments will depend on the election option exercised by
the taxable person under the law.

Taxable person preparing financial statements on

accrual basis and calculating taxable income

Option 2 :
Option 1: Election choice as per Article
Election choice as per Article 20(3) is exercised i.e. accounting
20(3) is not exercised i.e. profits adjusted for gains &
no adjustments made to losses on a realization basis.
accounting profits This option will result in a
deferred tax impact.

Option 2(b):
Accounting profits adjusted
Option 2(a): for only unrealised gains and
Accounting profits adjusted for losses in relation to assets
all unrealised accounting gains and liabilities held on capital
or losses related to fair value or account (such as plant and
impairment machinery or buildings and
non-current liabilities such as
long-term loans)

Financial statement line items requiring recognition of deferred taxes depending on the choice elected by the taxable persons :

Financial instruments at fair Non-financial assets at fair Impairment of assets Foreign exchange gains/
value value • Trade receivable, losses on
• Derivatives • Property, Plant and Contract Assets • debtors/ creditor
• Investments Equipment (PPE) • Investments • Loan
• Investment property • Investment property
• Biological assets • PPE
• Intangible Assets
Worked example

• Company A prepares its financial statements on an accrual basis and has elected to take into account gains and
losses on all assets and liabilities on a realisation basis for CIT purpose. The financial year for the company is January to
December and therefore, its first tax period will commence from 1 January 2024.
• Assuming the opening balance as on 1 January 2024 of financial assets at FVTPL is USD 100 million.
• As at 31 December 2024, the financial asset at FVTPL is fair valued at USD 120 million, resulting in unrealized gain of USD 20
million in the accounting books.
• In the year 2025, the company transfers the asset for USD 120 million, resulting in derecognition of the asset and realization
of gain of USD 20 million.
Amount in USD million
B/S
Financial Asset at FVTPL as per accounting books P&L impact
impact
Deferred Current
Financial year Deferred
Tax Tax
Opening balance Closing balance Fair value gain/(loss) Asset/ charge/ Tax charge/
(credit)
(Liability) (credit)
20 (1.8)
Jan-Dec 2024 100 120 - 1.8
(unrealized) (20 x 9%)

20
Jan-Dec 2025 120 - - 1.8 -1.8
(realized)
FVTPL = Fair Value Through Profit & Loss ; FVTOCI = Fair Value Through OCI (Other comprehensive income)

2. Carry forward of unutilised tax losses

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.

Worked example
Company A has a history of recent losses, which is a strong evidence that future taxable profit may not be available. Therefore,
the carryforward of tax losses would depend on the evaluation of a) existence of sufficient taxable temporary differences or b) a
convincing evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can
be utilised by the Company

Further, in case company A plans business combination or restructuring, the interaction of the tax positions of Company A and it’s
acquiree may result in a change in the assessment of recoverability of company A’s DTA. In case company A has not previously
recognized a DTA for its tax losses, it may reassess whether as a result of business combination it is able to utilise these tax losses
against the future taxable profit of the combined entity.

3. Business combination and restructuring

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.

Worked example
On 1 January 202X, Company A acquired Company B for USD 50 million. On the date of acquisition, the fair value of the identifiable
assets and liabilities of Company B was USD 40 million including an intangible asset that was not recognised in the individual
financial statements of Company B, of USD 5 million. The tax base of the assets and liabilities acquired, other than the intangible
asset, was equal to their accounting base. The tax base of the intangible asset was nil.

A taxable temporary difference of USD 5 million exists at the date of acquisition requiring recognition of DTL of USD 0.45 million
[USD 5 million × 9% (tax rate)] in the consolidated financial statements of Company A. The net assets at the date of acquisition are
therefore, USD 39.55 million (USD 40 million – USD 0.45 million) and goodwill USD 10.45 million (USD 50 million – USD 39.55 million) . The
DTL will reverse as the recognized intangible asset is amortized over its useful life.
Note: In the case of formation of a tax group, impact of the PPA adjustments will require further consideration based on the facts of each case.
4. Intra-Group transactions
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.

Worked example

Parent company A sells inventory to a wholly owned subsidiary B for USD 300 million. This results in a profit of USD 50 million
in A’s separate financial statements. Under CIT law, Parent A and subsidiary B have the option to form a tax group and file a
consolidated tax return.

Scenario 1: Tax Group is NOT formed

Since the entities have option to not form the tax group, the corporate tax will be calculated separately for each taxable person
(i.e. Parent A and Subsidiary B).
Parent A will pay a current tax of USD 4.5 million on its profit of USD 50 million (i.e. USD 50 million * 9% tax rate).
When Parent A prepares its consolidated financial statements under IFRS, the profit of USD 50 million (arising from intercompany
transaction) is reversed against the carrying amount of the unsold inventory of USD 300 million. Therefore, the carrying amount
of the inventory on consolidation is USD 250 million while the its tax base is USD 300 million. This difference results in a deductible
temporary difference of USD 50 million to be recognized on consolidation at 9% tax rate, subject to the general DTA recognition
criteria.
The recognized DTA will reverse as and when the inventory is sold outside the group.

Scenario 2: Tax Group is formed

If company A and company B were to form a tax group, subject to conditions of CIT law being met, this intra-group transaction
would have been eliminated for tax purposes and thus no temporary difference may arise on consolidation.

5. Interest expense
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.

Worked example

Company A is subject to tax and has EBTIDA of USD 100 million (excluding any exempt income) for the financial year 20XX. It has
recognised in profit and loss, interest on bank loan of USD 20 million and interest on lease liability of USD 25 million. Combined
interest expense in the tax year is USD 45 million (i.e. 45% of EBITDA).

Company A can claim interest deduction to the extent of USD 30 million (i.e. 30% of EBITDA) and the remaining USD 15 million will
be carried forward for set-off in the subsequent years. On this carried forward balance, DTA shall be recognised subject to the
general DTA recognition criteria.
6. Tax Group
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.

Worked example
Parent A and wholly owned Subsidiary C have formed a tax group for the
CIT law purposes. Subsidiaries B and D are not eligible to be a part of the
Tax Group tax group as per Article 40 of the CIT Law. In this case, management of A is
required to:
Parent A
• Prepare separate set of financial statements for tax purposes,
consolidating the financial results, assets and liabilities of the
Subsidiary C and eliminating the transactions between itself and
Subsidiary B
(Qualifying
Subsidiary C Subsidiary D Subsidiary C.
100% equity 65% equity • Maintain audited financial statements of the tax group if the revenue
Free Zone)
exceeds AED 50,000,000 during the relevant tax period.
• Define accounting policy for allocation and treatment of tax expenses
between Company A and Subsidiary C.

7. Transfer of tax losses

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.

Worked example

Company P has a wholly owned subsidiary, Subsidiary S is subject to a tax rate of 9% and has tax losses of USD 100 million. Initially,
S recognizes a related DTA of USD 9 million. S agrees to transfer its tax losses of USD 100 million to its parent, company P, at the end
of the year.
In such a case, management of S and P is required to :
• Consider if there is any exchange of consideration between P and S for such a loss transfer,
• Derecognize the DTA of USD 9 million related to the tax losses transferred from the books of S and recognise in the books of P.

If tax losses are transferred for no payment, the entities, in their separate financial statements shall choose accounting policy
to be applied consistently, to disclose such transfers in their tax reconciliations or to recognise them as equitycontributions/
distributions as appropriate.

8. Provision and accruals

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
 Other impact areas beyond accounting and reporting

Whether holistic impact on Has the IT system been tailored to

Business has been evaluated? account for current and deferred
taxes?
Management will need to consider
tax and accounting impact on IT systems will need to support the
various strategic decisions such OUNTING &
ACC
new requirements, including (a)
as business acquisitions, group managing two sets of accounts for
restructuring, new company set-up REPORTING tax and accounting purpose, (b)
(mainland vs free zone), formation consolidation of tax groups and

M
of tax groups, intra-group (c) computation, reporting and

TE
transactions, etc. disclosures of CIT. Companies will

S
have to consider data required for

I T SY
BUSINESS
tax computation, accounting and
reporting, including the changes

Whether clearly defined policies

CIT IMPACT required in existing chart of
accounts.
and procedures are developed
and communicated within the
organization?

E
Management will need to

PL
establish adequate policies O O
VE PE
and procedures with robust RN
governance and internal control ANCE
framework to meet the tax
and accounting compliance
requirements.

Whether the people in the organisation possess the

required knowledge and experience to cater to the new
requirements?

Relevant departments and resources will need to be upskilled

and trained on various aspects such as (a) knowledge on
additional tax , accounting & reporting requirements (b)
increased legal compliances & documentation; and (c)
operating digital tax tools and tailored finance & IT systems
Contact us:

Sandip Khetan
Co-Founder, Global Head of Dinesh Jangid
Accounting & Reporting Consulting Regional Managing Partner
[email protected] [email protected]

Kaushik Rambhia Radhika Sharma

Director, Accounting & Manager, Accounting &
Reporting Consulting Reporting Consulting
[email protected] [email protected]

Address: 17-31, Office Towers Level 17,

Central Park Towers, DIFC
Dubai, United Arab Emirates.
Tel: +971 4 410 6698
www.uniqus.com