In our preceding article, we offered a comprehensive summary of the recent corporate tax guide CTGDTI1 published by the Federal Tax Authority (FTA) concerning the assessment of taxable income. This article will emphasize crucial insights from the guide.

The corporate tax legislation stipulates that connected individuals, including owners, officers, and directors, must be remunerated at market rates. I expected the FTA to furnish salary ranges according to industry, business type, and revenue. Instead, the guide mandates that companies must appraise the salaries of connected individuals at arm's length pricing. Therefore, taxable entities must perform benchmarking analyses to ascertain the fair market value of these salaries.

As previously understood, accounting for depreciation, amortization, depletion, and provisions is permissible for tax purposes, which the guide confirms. A new aspect noted is that if a provision is established before an individual becomes taxable, any reversal post-taxability will be taxed. For instance, if a provision is made in 2023 and reversed in 2024, the reversal will be taxed when computing taxable income for 2024. Moreover, if a provision is made for an item not tax-deductible, such as ongoing litigation due to legal violations, it will also be disallowed.

If a taxable entity has paid a fine for breaching any laws, rules, or regulations, that fine is non-deductible for corporate tax purposes, similar to speeding fines. However, fines incurred during normal business operations, like penalties for contract breaches, are tax-deductible.

If net interest surpasses Dh12 million annually, the taxable entity can claim either Dh12 million or 30% of Ebitda, whichever is higher. Excess interest can be carried forward for up to ten years. It's crucial to note that this carried-forward interest will impact adjusted Ebitda in future periods and be included in net interest for those periods. Interest expenses not subject to these constraints will be fully deductible and will not contribute to the Dh12 million threshold but will be added back when calculating adjusted Ebitda, as illustrated in Case Study 2 of the guide.

Dividends received from a resident legal entity are tax-exempt without additional conditions. Conversely, dividends from a foreign legal entity are exempt only if the taxable entity meets the participation exemption criteria. Additionally, capital gains, impairment gains, and foreign exchange gains are tax-exempt if the participation conditions are met; otherwise, they are taxable.

Once the requisite conditions are fulfilled, losses can be carried forward indefinitely. Within a qualifying group, one taxable entity can transfer its losses to another. When losses are carried forward or transferred, they can offset up to 75% of the recipient's taxable income or future taxable profits. This implies that 25% of the taxable income remains taxable, as shown in various case studies in the guide. In the future, if the necessary conditions are not met, such as the taxable entity not being part of the qualifying group or lacking business or ownership continuity, the adjusted losses will not be reversed, and further carried-forward losses will not be eligible for adjustment until the conditions are satisfied.

Contributions to private pension funds are allowed up to a maximum of 15% of an employee's total remuneration for the relevant tax period, based on payments made. If the contribution has not been paid, it will not be allowed for tax purposes, even if it falls within the 15% limit.

The withholding tax credit will take precedence over the foreign tax credit. The amount of the foreign tax credit cannot exceed the corporate tax owed in the UAE on foreign source income. To claim the foreign tax credit, taxable entities must calculate their foreign taxable income according to UAE tax rules, and foreign tax will be determined using a weighted average basis as outlined in the guide.

This guide is illustrative, with case studies presented in an explanatory manner. I strongly recommend reading it for a better understanding of corporate tax. The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above article is not an official opinion of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.