Election to use the realisation basis

For the purpose of determining Taxable Income, Businesses that prepare Financial Statements using the Accrual Basis of Accounting may elect to take into account gains and losses on a realisation basis.^[14] Broadly, this election can be made either in relation to all assets and liabilities that are subject to fair value or impairment accounting under the applicable Accounting Standards (i.e. IFRS or IFRS for SMEs), or only for assets that are held on capital account.^[15]

An election to apply the realisation basis must be made by the Taxable Person during the first Tax Period. The election is irrevocable except under exceptional circumstances, pursuant to approval by the FTA.^[16] If the Taxable Person does not make the election to apply the realisation basis in their first Tax Period, then this will be considered an irrevocable election in itself.

Refer to Section 11 (Case Study 7a) for details on the treatment of unrealised gains or losses while determining Taxable Income.

Domestic Dividends

Dividends, and other profit distributions, received from a juridical person that is a Resident Person are exempt from Corporate Tax.^[19] There are no additional conditions that a Taxable Person has to meet in order to benefit from this exemption.

Participation Exemption

Foreign Permanent Establishment exemption

To eliminate potential international double taxation, a Resident Person can make an election to have the income and associated expenditure derived from Foreign Permanent Establishments exempted from Corporate Tax in the UAE where the relevant conditions are met.^[30]

Where such an election is made, the Resident Person shall not include the following items in the determination of Taxable Income:

• Losses in any of its eligible Foreign Permanent Establishments,^[31] and

• Income, and associated expenditure, in any of its eligible Foreign Permanent Establishments.^[32]

In addition, any Foreign Tax Credit otherwise available as a reduction in the Corporate Tax Payable, will not be available to be used by the Resident Person if an election is made.^[33]

In determining the income, expense or loss of each Foreign Permanent Establishment that is treated as exempt, a Resident Person and its Foreign Permanent Establishments must be treated as separate and independent Businesses in accordance with internationally accepted profit attribution methods, such as the separate entity approach, and any transactions which take place between them must be treated as having taken place at Market Value.^[34]

Where a Resident Person elects to exclude the income, expenses and losses of the Foreign Permanent Establishments from the calculation of its Taxable Income, the election will apply to all the Resident Person's Foreign Permanent Establishments which are subject to Corporate Tax, or a tax of a similar character to Corporate Tax, in the relevant foreign country at a rate of not less than 9% (i.e. the 'subject to tax requirement').^[35]

Additionally, if a Resident Person has utilised a Tax Loss incurred in their Foreign Permanent Establishment, that Tax Loss must be fully offset by the Taxable Income from the Foreign Permanent Establishment in a subsequent Tax Period or Tax Periods before the Resident Person can elect to apply the Foreign Permanent Establishment exemption.^[36]

Refer to Section 12 (Case Study 7b) for details of the Foreign Permanent Establishment exemption while determining Taxable Income.

Expenditure incurred wholly and exclusively for the Business

The general rule is that expenditure must be incurred wholly and exclusively for the purposes of the Taxable Person's Business and must not be capital in nature for the expenditure to be deductible for Corporate Tax purposes.^[37]

Additional specific deduction rules are applicable for specific categories of expenditure, for example, entertainment expenditure (see Section 4.5.10) and Interest expenditure (see Sections 4.6 and 4.7).

It is necessary to consider the purpose for incurring the expenditure to assess whether it can be deducted for Corporate Tax purposes. For it to be fully deductible, the expenditure needs to be incurred 'wholly and exclusively' for Business purposes. If expenditure is incurred for more than one purpose, the proportion of the expenditure that is incurred for non-Business purposes is not deductible for Corporate Tax purposes and must be added back when determining Taxable Income.^[38]

Employment related expenditure

Employee costs are generally considered to be wholly and exclusively incurred for Business purposes provided that they are not excessive (and subject to the requirement to meet the arm's length standard where employees are Related Parties or Connected Persons).

As such, it is not relevant whether an employee is paid wholly in cash or also receives other benefits, such as a car for personal use. In this situation, the personal use should be viewed in the same way as the employee spending their cash salary on items for their personal benefit. The same applies to other benefits, such as medical insurance or a flight allowance (for spouse and children). In other words, the cost is wholly and exclusively for Business purposes as rewarding employees is wholly a Business purpose. The same principle applies in relation to costs incurred for entertainment of employees, for example, for team building at a seasonal function, or to reward performance.

This should be distinguished from entertainment expenditure incurred to entertain business partners or customers as discussed in more detail in Section 4.5.10 below.

Refer to Section 5 (Case Study 1) for the treatment of expenditure incurred wholly and exclusively for the purposes of the Business while determining Taxable Income.

Expenditure incurred in deriving Exempt Income

Expenditure incurred in relation to deriving Exempt Income is not deductible when determining Taxable Income.^[39]

Expenditure incurred for more than one purpose

If expenditure is incurred for more than one purpose, the portion of the expenditure which can be deducted must be determined as follows:^[40]

• Any identifiable part or proportion of the expenditure incurred wholly and exclusively for the purposes of deriving Taxable Income, is deductible, and

• An appropriate proportion of any unidentifiable part or proportion of the expenditure incurred for the purposes of deriving Taxable Income that has been determined on a fair and reasonable basis, having regard to the relevant facts and circumstances of the Taxable Person's Business, is deductible.

Based on the above, if expenditure is incurred partly for Business purposes and partly for some other purpose, the amount must be apportioned so that only the part relating to deriving Taxable Income will be allowed as a deduction. This includes any identifiable part or proportion of any unidentifiable expenditure incurred wholly and exclusively for the purposes of deriving Taxable Income that has been determined on a fair and reasonable basis. ^[41] What is fair and reasonable will depend on the circumstances and facts of each case. In many cases, there will be more than one method of apportioning expenses which is fair and reasonable to use.

Allocation keys are criteria used to determine how expenses can be assigned or distributed across different departments, products, services, or divisions within a Business. These keys can be applied to factors such as headcount, floor space, usage, time spent, or any other measurable and reasonable basis. The primary goal of allocation keys is to provide a fair and accurate distribution of expenses, allowing for a more accurate determination of the income arising from each income component.

The appropriate allocation key will depend on the nature of the expense and the contribution that it makes to each income component. In many cases, an allocation that prorates expenses based on Revenue will be considered as a reasonable allocation. However, this will not always be the case and the following principles should be considered to determine whether Revenue or some other basis will be appropriate to allocate each expense item. For example:

Cause and effect: An allocation should be consistent with identifiable cause-and- effect relationships (for example, machinery running hours may be an appropriate allocation key to allocate maintenance costs)

Benefits derived: An allocation should be commensurate with the benefits received.

The allocation key chosen must be logical and must fairly represent the benefit that the expense generates for each income component. The allocation key should also be used consistently for each Tax Period, unless there is a change in fact pattern which may justify a change in allocation or methodology.

The fair and reasonable approach chosen should accurately reflect the underlying activity, should not be unnecessarily burdensome and complex for the Taxable Person to determine and justify, or for the FTA to understand and review.

If the expenditure incurred for more than one purpose cannot be apportioned on a fair and reasonable basis, it will not be allowed as a deduction for Corporate Tax purposes.

Refer to Section 5 (Case Study 1) for the treatment of expenditure incurred for more than one purposes while determining Taxable Income.

Non-arm's length expenditure

Payments or benefits provided by a Taxable Person to its Related Parties and/or Connected Persons would be deductible only to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Related Parties and/or Connected Person, and where the payment or benefit is incurred wholly and exclusively for the purposes of the Taxable Person's Business.^[42]

For example, the salary or bonus paid to directors or officers of a company or an owner of the Taxable Person would be deductible when determining Taxable Income, but only insofar as this salary corresponds with the Market Value rates for such services rendered. In order to determine if the value of a service or benefit provided matches its Market Value, the arm's length standard should be applied.^[43]

Capital expenditure

Capital expenditure is not deductible when determining Taxable Income. Capital expenditure is any expenditure that creates an enduring benefit to a Business. This is in contrast to revenue expenditure, which supports the day-to-day operations of the Business. For example, purchasing a long-term asset like machinery would be a capital expense, but paying for routine maintenance to keep the machinery running would be a revenue expense. The question of whether expenditure is of a capital or revenue nature will depend on the particular facts and circumstances and will need to be determined on a case-by-case basis, in line with the Accounting Standards applied by the Taxable Person.

In relation to capital expenditure, the following principles are laid out in Article 7 of Ministerial Decision No. 134 of 2023 :

• No deduction shall be allowed for depreciation, amortisation or other change related to capitalised expenditure, where such expenditure would not have been deductible had it been an expenditure that is not capital in nature.

• Expenditures that are capital in nature that have not been deducted for the purpose of calculating the Taxable Income, other than those under the above bullet point, shall be deductible in the calculation of gains or losses upon the realisation of the asset or liability.

• In this respect, expenditures that are capital in nature shall be those treated as such under the Accounting Standards applied by the Taxable Person.

While capital expenditure is not deductible, when determining Taxable Income, the depreciation of the cost of capital assets is a deductible expense for Corporate Tax purposes. Depreciation is an accounting concept which allows for the cost of an asset to be spread over the life of the asset (representing the reduction of the asset's value).

In certain cases, a Taxable Person may have an accounting policy to not capitalise low value capital items that do not meet the recognition criteria, as per the relevant Accounting Standard. Such expenditure is directly expensed in the income statement. In such circumstances, the accounting treatment should be followed and the expense will be fully deductible in the Tax Period in which it is incurred, provided that it is not otherwise non-deductible.

In accordance with the relevant Accounting Standard, the Taxable Person may capitalise the directly attributable costs or costs initially incurred to acquire or construct an asset. In certain cases, a part of these costs, if debited to the income statement, would not have been allowed as a deduction while determining Taxable Income.

Article 7 of Ministerial Decision No. 134 of 2023 states that the depreciation/ amortisation charge which relates to such non-deductible expenditure will also not be allowed as a deduction for the purpose of determining Taxable Income. Examples of such expenditure that could be capitalised include fees paid to Related Parties/Connected Persons which do not meet the arm's length standard (see Section 4.5.5) or, fines and penalties levied by a statutory body/government on the acquisition or construction of the asset (see Section 4.5.9) etc. Since these expenses are generally not deductible while determining Taxable Income, the corresponding depreciation charge will also not be deductible.

The treatment of capital expenditure when determining Taxable Income is covered in Section 5 (Case Study 1) and Section 11 (Case Study 7a) for a Taxable Person following the Accrual Basis of Accounting and in Section 10 (Case Study 6) for a Taxable Person following the Cash Basis of Accounting.

Pre-incorporation or pre-trade expenses

Certain expenditure may be incurred before the Business is officially incorporated (for example, in the case of a company), which are typically associated with the process of setting up a Business. Examples include feasibility studies, registration fees, legal and professional fees in relation to incorporation documents, etc.

As a general rule, unless specified otherwise, any such expenditure incurred wholly and exclusively for the Business that is not capital in nature would be allowed as a deduction in the Tax Period in which it is incurred.^[44] 'Incurred' means the time at which it is required to be recorded in the Financial Statements based on IFRS or IFRS for SMEs, where a Taxable Person uses the Accrual Basis of Accounting.

Similarly, in the case of the Cash Basis of Accounting, the pre-incorporation expenses will be allowed in the first Tax Period to the extent recorded in the income and expenditure statement.

Thus, pre-incorporation expenditure, (though incurred before the Business is officially incorporated or set-up), will be allowed as a deduction to the extent to which it is recorded in the income statement once the company is incorporated (or the Business is set up), in line with the relevant Accounting Standards, subject to meeting the general deduction criteria under the Corporate Tax Law^[45] and provided that it has not been claimed as deductible expenditure by another Taxable Person.

A Taxable Person may also incur pre-trading expenses i.e. expenditure incurred after a Business is incorporated or set-up, but before it starts generating revenue or conducting its normal trading operations. These expenses typically occur during the pre-launch phase, when a Business is preparing to commence its commercial activities. Examples include costs associated with product development, marketing and advertising expenses, office setup costs, utilities, office equipment, expenses for hiring and training employees before the commencement of operations, etc.

Where such pre-trading expenditure is recorded as an expense in the Financial Statements, it will be allowed as a deduction in the Tax Period when it is incurred, subject to meeting the general deduction criteria under the Corporate Tax Law,^[46] even if the Business has not started generating Revenue in the Tax Period in which the expense is incurred.

Refer to Section 5 (Case Study 1) for the treatment of expenditure incurred prior to commencement of Business when determining Taxable Income.

Creation & reversal of provisions (bad debts, write-off and recovery)

A provision is typically recognised when a past event has created a legal or constructive obligation, an outflow of resources is probable, and the amount of the obligation can be estimated reliably. The amount recognised is the best estimate of the settlement amount at the end of the Financial Year.

Considering the above, if a Taxable Person records a provision in its Financial Statements in accordance with the relevant Accounting Standards (i.e. IFRS or IFRS for SMEs), the provision will be allowed as a deduction, as long as it satisfies the requirements for deductibility of expenditure under the Corporate Tax Law (so for instance it is not in respect of an illegal payment - see Section 4.5.9).

If such a provision is released or reversed in a subsequent Tax Period, there are no specific adjustments required to be made to the release or reversal. Therefore, the relevant credit to the Financial Statements (i.e. income) will be treated as Taxable Income for Corporate Tax purposes.

In instances where a provision was recorded before a Taxable Person's first Tax Period and then reversed after the Person becomes subject to Corporate Tax, the reversal is taxable when the credit is recorded in the Financial Statements.

Non-deductible expenses

Aside from the circumstances discussed above, deductions are also specifically disallowed for:

• A donation, grant or gift made to an organisation that is not a Qualifying Public Benefit Entity (see Section 5, i.e. Case Study 1 for details).^[47] Any amounts paid by Taxable Persons in relation to Zakat will only be deductible if it is paid to a Qualifying Public Benefit Entity,

• Any fines and penalties, other than amounts awarded as compensation for damages or breach of contract (see Section 5, i.e. Case Study 1 for details),^[48]

• Bribes or other illicit payments (see Section 5, i.e. Case Study 1 for details),^[49]

• Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person (see Section 5, i.e. Case Study 1 for details),^[50]

• Amounts withdrawn from the Business by a natural person who is a Taxable Person or a partner in an Unincorporated Partnership,^[51]

• Corporate Tax,^[52]

• Recoverable input Value Added Tax (see Section 5, i.e. Case Study 1 for details),^[53]

• Tax on income imposed outside the UAE (however, tax relief may be available as a Foreign Tax Credit),^[54] and

• Contributions made by employers to a private pension fund in respect of its employees which are not paid in the Tax Period, or are in excess of 15% of the employee's total remuneration in the relevant Tax Period (see Section 5, i.e. Case Study 1 for details).^[55]

Local taxes that are not in the nature of Corporate Tax, such as municipal and property taxes, will be deductible.

However, a tax under an Emirate Law, such as that paid by branches of foreign banks in the UAE is not allowed as a deduction from Taxable Income under the Corporate Tax Law. The availability or not, of a credit against a tax under Emirate Law in respect of Corporate Tax, such as under Dubai Law No. 1 of 2024 on Taxation of Foreign Banks Operating in the Emirate of Dubai, does not alter this.

Entertainment expenditure

Entertainment is considered as hospitality of any kind and entertainment expenditure is the expense of providing entertainment. It is common to incur such costs for the entertainment, amusement or recreation of customers, shareholders, suppliers, or other business partners, such as hospitality at restaurants, cultural events, sporting events, hotel stays and similar trips. Entertainment expenditure usually serves to build relationships and promote the Business in a more informal or social setting. Entertainment expenditure includes expenditure in connection with meals (food and beverages), accommodation, transportation, admission fees, as well as facilities and equipment used in connection with such entertainment.^[56]

However, this type of expenditure often contains a private element that is provided for the enjoyment or hospitality of the recipients/guests that would prevent the expenditure from being wholly and exclusively incurred for Business purposes. Thus, a 50% deduction for entertainment expenditure is allowed for Corporate Tax purposes.^[57]

For Corporate Tax purposes, the accounting classification of a particular expense is not relevant when considering whether such an expense is entertainment expenditure.

Meaning of Interest

Businesses regularly borrow money and take out loans for a wide variety of reasons, for example, to purchase Business assets, to meet costs, or increase working capital. As a result, Interest is a common Business expense.

Interest expenditure can be deducted when determining Taxable Income for the Tax Period in which it is incurred, subject to the general rules for deductibility.^[58] In addition, such expenditure is subject to the General Interest Deduction Limitation Rule (refer Section 4.6 for details).^[59]

For the purposes of the General Interest Deduction Limitation Rule, Interest means any amount that is accrued or paid for the use of money or credit, including discounts, premiums, profit paid in respect of an Islamic Financial Instrument, other payments economically equivalent to interest, and any other amounts incurred in connection with the raising of finance, but does not include payments of the principal amount.^[60] These categories are elaborated on below.

Application of the General Interest Deduction Limitation Rule

A Taxable Person's Net Interest Expenditure is subject to the General Interest Deduction Limitation Rule. The Net Interest Expenditure is the difference between the amount of Interest expenditure incurred (including any carried forward Net Interest Expenditure) and the Interest income derived during a Tax Period.^[69]

Where the Net Interest Expenditure exceeds AED 12 million in a Tax Period, the amount of deductible Net Interest Expenditure is the greater of:

• 30% of adjusted EBITDA (earnings before the deduction of Interest, tax, depreciation and amortisation) for a Tax Period, calculated as the Taxable Income for the Tax Period with adjustments for:^[70]

  • Net Interest Expenditure for the relevant Tax Period,

  • Depreciation and amortisation expenditure taken into account in determining the Taxable Income for the relevant Tax Period,

  • Any Interest expenditure (minus Interest income) relating to historical financial assets or liabilities held prior to 9 December 2022, and

  • Any Interest expenditure (minus Interest income) relating to Qualifying Infrastructure Projects.

• Or the de minimis threshold of AED 12 million.^[71]

This is known as the General Interest Deduction Limitation Rule.

If the Net Interest Expenditure is below the de minimis threshold of AED 12 million for a Tax Period, the General Interest Deduction Limitation Rule does not apply.^[72] This means that, subject to the Specific Interest Deduction Limitation Rule, ^[73] the full amount of Interest expenditure incurred in a Tax Period can be deducted.

The de minimis threshold of AED 12 million is adjusted in proportion to the length of the Tax Period, if the relevant Tax Period is more than or less than 12 months.^[74]

Where the Net Interest Expenditure is less than the higher of 30% of adjusted EBITDA (see Section 4.6.4) and AED 12 million (as adjusted for a Tax Period of more than or less than 12 months), no adjustment is required under the General Interest Deduction Limitation Rule. The Net Interest Expenditure for the relevant Tax Period will be deductible.

Any Net Interest Expenditure disallowed in a Tax Period by the General Interest Deduction Limitation Rule can be carried forward and utilised in the subsequent 10 Tax Periods in the order in which the amount was incurred, subject to the same conditions as the General Interest Deduction Limitation Rule.^[75]

To determine the deductible and non-deductible Net Interest Expenditure, the following components need to be calculated:

• Net Interest Expenditure, and

• 30% of adjusted EBITDA.

Calculation of Net Interest Expenditure

As noted above, Net Interest Expenditure is the difference between the amount of Interest expenditure incurred (including any carried forward Net Interest Expenditure) and the Interest income accrued. Net Interest Expenditure will include all Interest components discussed in Section 4.6.1.

However, the following will not be considered while calculating the Net Interest Expenditure for the purposes of the General Interest Deduction Limitation Rule:

• Interest expenditure that is disallowed under any other provisions of the Corporate Tax Law,^[76] for example, the Specific Interest Deduction Limitation Rule ^[77] (see Section 4.7) or non-arm's length amounts,^[78]

• Interest income or Interest expenditure related to grandfathered debts (i.e. prior to 9 December 2022),^[79] and

• Interest income and Interest expenditure in relation to Qualifying Infrastructure Projects.^[80]

An illustrative list of the adjustments that may be relevant in calculating the Net Interest Expenditure is as follows:

Calculation of 30% of adjusted EBITDA

For the purposes of the General Interest Deduction Limitation Rule, EBITDA for a Tax Period is the Taxable Income calculated in accordance with the general rules for determining Taxable Income^[85] (i.e. all adjustments are required to be made except for adjustments in relation to the General Interest Deduction Limitation Rule and Tax Loss relief provisions). Such Taxable Income (even if negative) before the General Interest Deduction Limitation Rule and Tax Loss relief is required to be increased by the following, to arrive at the 'adjusted EBITDA' for the purposes of the General Interest Deduction Limitation Rule:^[86]

• Net Interest Expenditure for the relevant Tax Period (see Section 4.6.3),

• Depreciation and amortisation expenditure taken into account in determining the Taxable Income for the relevant Tax Period,

• Any Interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022, and

• Any Interest income or Interest expenditure in relation to Qualifying Infrastructure Projects.

If the adjusted EBITDA as per the above results is a negative amount, then the adjusted EBITDA will be considered to be AED 0.^[87]

An illustrative list of the adjustments that may be relevant in calculating the adjusted EBITDA is as follows:

Exceptions to the General Interest Deduction Limitation Rule

The General Interest Deduction Limitation Rule does not apply to:^[88]

• Banks,

• Insurance Providers, or

• Natural persons undertaking a Business or Business Activity in the UAE.

Refer to Section 6 (Case Study 2) for details of the applicability of the General Interest Deduction Limitation Rule while determining Corporate Tax.

Tax Loss relief

A Taxable Person must first offset the Tax Loss against its own Taxable Income before it can be transferred to another Taxable Person or carried forward to subsequent Tax Periods. If in any Tax Period the Taxable Person is unable to offset the Tax Loss against its own Taxable Income, then it can transfer the Tax Loss to another Taxable Person or carry forward the Tax Loss (subject to meeting the necessary conditions).^[95]

Whilst transferring the Tax Loss to another Taxable Person is optional, carrying forward any unused Tax Loss is not. For example, if Company A has incurred a Tax Loss of AED 8,000,000 in Year 1, it can transfer the Tax Loss to Company B (assuming the necessary conditions for transfer are met) in Year 1, up to 75% of Company B's Taxable Income of Year 1. If Company A has any unutilised Tax Loss (say AED 5,000,000), after the transfer to Company B, the remaining Tax Loss must be carried forward by Company A to Year 2 (assuming the necessary conditions for carry forward are met).

Continuing from the above, for instance, in Year 2 the Taxable Income of Company A and Company B is AED 4,000,000 and AED 7,000,000, respectively. Company A is required to utilise 3,000,000 (being 75% of its Taxable Income of AED 4,000,000) of the Tax Loss that has been carried forward from Year 1 (i.e. AED 5,000,000) before any portion of such Tax Loss can be transferred to Company B. After Company A has offset its own Taxable Income against the carried forward Tax Loss, it can transfer the remaining Tax Loss of AED 2,000,000 (i.e. AED 5,000,000 less AED 3,000,000) to Company B.

If a Taxable Person has brought forward Tax Losses from a previous Tax Period of less than 75% of their Taxable Income, they must use all of the Tax Losses in the current Tax Period and cannot choose to carry these Tax Losses forward to a subsequent Tax Period (or transfer them).^[96] Tax Losses cannot be carried back to previous Tax Periods.

A Taxable Person must first utilise its own brought forward Tax Losses before it can utilise a Tax Loss transferred to it.^[97]

Refer to Section 7 (Case Study 3) for the treatment of a Tax Loss while determining Taxable Income.

Limitation on carry forward of Tax Losses

Specific rules apply for juridical persons that have Tax Losses carried forward and have had a change of ownership in the Tax Period.

A Tax Loss can be carried forward by a Taxable Person, provided the owners of the Taxable Person continuously hold at least 50% ownership from the start of the period in which the Tax Loss is incurred, to the end of the Tax Period in which the Tax Loss is used to offset against Taxable Income.

If there is a change in ownership of more than 50%, Tax Losses can still be carried forward provided the same or similar Business is carried on following the change in ownership.^[98]

These rules do not apply where the Taxable Person's shares are listed on a Recognised Stock Exchange.^[99]

If the conditions are met, the Tax Losses must be carried forward.

A natural person can carry forward a Tax Loss without the need to consider the above limitation rule, as the concept of ownership interest does not apply in the case of a natural person.

Refer to Section 9 (Case Study 5) for treatment of a Tax Loss if there is change in ownership, while determining Taxable Income.

Transfer of Tax Losses

Tax Losses may be transferred between Taxable Persons that are both Resident Persons and juridical persons. All of the following conditions must be met:^[100]

• Either of the entities has a direct or indirect ownership interest of at least a 75% in the other, or a third entity has a direct or indirect ownership interest of at least 75% of the shares in both,

• The Financial Year of each Taxable Person ends on the same date,

• Both Taxable Persons prepare their Financial Statements using the same Accounting Standards, and

• None of the entities are Exempt Persons or Qualifying Free Zone Persons.

Taxable Persons must meet the qualifying common ownership conditions from the start of the Tax Period in which the Tax Loss is incurred to the end of the Tax Period in which the transferred Tax Loss is used by the other Taxable Person (i.e. receiving entity) against its Taxable Income.^[101]

The Taxable Person who transfers the Tax Losses will reduce its available Tax Losses by the amount transferred.^[102]

Transferred Tax Losses can reduce the recipient's Taxable Income by a maximum of 75% of their Taxable Income in that Tax Period.^[103] Thus the maximum Tax Loss that can be transferred to the recipient is 75% of their Taxable Income in that Tax Period. It is not possible to transfer a Tax Loss in excess of 75% of the recipient's Taxable Income.

A single Taxable Person may transfer their Tax Losses to more than one Taxable Person provided that in each case the relationship of the recipient Taxable Person with the Taxable Person transferring their Tax Losses meets the relevant conditions. Similarly, a recipient company can claim Tax Losses from more than one transferring company provided that the total Tax Loss offset does not exceed 75% of the recipient's Taxable Income and that all other conditions for the transfer of Tax Losses are met.

Refer to Section 9 (Case Study 5) for the implications of transferring a Tax Loss while determining Taxable Income.

Foreign Tax Credit

Corporate Tax Payable may be reduced by any available Foreign Tax Credit for the same Tax Period.^[107] Foreign Tax Credit is the amount of foreign taxes paid on foreign source income which has not been exempted. A Foreign Tax Credit under Article 47 of the Corporate Tax Law is allowed even if foreign tax is paid in a jurisdiction with which the UAE does not have a Double Taxation Agreement.

A Double Taxation Agreement to which the UAE is a party may specify a method of providing relief from double taxation which is different to the Foreign Tax Credit rules set out in Article 47 of the Corporate Tax Law. Article 66 of the Corporate Tax Law provides that to the extent the terms of a Double Taxation Agreement are inconsistent with provisions of the Corporate Tax Law, the terms of the Double Taxation Agreement shall prevail.

A Foreign Tax Credit is available for any foreign tax that is of a similar character to Corporate Tax. The following conditions should be all satisfied for a foreign tax to be considered of similar character to Corporate Tax:

• The foreign tax is imposed by and payable to the government (federal or state government) of a foreign jurisdiction,

• Payment of the foreign tax is compulsory and enforceable by tax laws in that foreign jurisdiction, and

• The foreign tax is imposed on profit or net income (i.e. income less deductions). Foreign withholding tax is deemed to meet this requirement.

In order to claim a Foreign Tax Credit, the pre-tax foreign source income must be included in the Taxable Income of the Taxable Person. The amount of Corporate Tax due should be calculated based on the overall Taxable Income, and Foreign Tax Credit can then be deducted from the amount of Corporate Tax Payable.

How to calculate Foreign Tax Credit

The amount of Foreign Tax Credit cannot exceed the amount of Corporate Tax due in the UAE on the foreign source income.^[108] Thus, the amount of Foreign Tax Credit is the lower of the following:

1. The actual amount of tax paid on foreign source income in the foreign jurisdiction.

2. The amount of the Corporate Tax due in the UAE on the foreign source income.

Since Corporate Tax applies to income on a net basis (Revenue less expenditure), the net foreign source income is to be determined by deducting economically linked expenditure from the relevant income. The deductibility of expenditure will be in accordance with the relevant rules in the Corporate Tax Law.^[109] It is possible that the foreign country has taxed the foreign source income on a gross basis, particularly in the case of withholding tax. However, since the Corporate Tax Law taxes income net of expenses, a Foreign Tax Credit is to be determined on net foreign source income.

As there are two rates of Corporate Tax in the UAE (i.e. 0% and 9%), the Corporate Tax due on foreign source income is to be determined on a weighted average basis using the following formula:

Corporate Tax due on relevant foreign source income = X * Y Z

where:

X=Corporate Tax due on total Taxable Income of the Taxable Person before any Foreign Tax Credit,

Y=Relevant net foreign source income, and

Z=Total Taxable Income of the Taxable Person

Unutilised Foreign Tax Credit

Any unutilised Foreign Tax Credit cannot be carried forward to future Tax Periods or carried back to earlier Tax Periods.^[110] Thus, an unutilised Foreign Tax Credit will be forfeited. Further, a Corporate Tax deduction for the unutilised Foreign Tax Credit is not possible.^[111] No refund will be given for unutilised Foreign Tax Credit.

In addition, Foreign Tax Credit can only be applied after any Withholding Tax Credit has been applied.^[112]

Income attributable to Permanent Establishment

A Permanent Establishment has the meaning contained in Article 14 of the Corporate Tax Law. A Person and its Permanent Establishment are Related Parties ^[117] and should be treated as separate and independent entities. This approach is known as the 'separate entity approach'.

The transactions between Related Parties or Connected Persons where one of the parties is a Permanent Establishment need to be conducted in line with the arm's length standard.

Expenditure incurred wholly and exclusively for the purpose of the Business

As noted in Section 4.5.1, expenditure that is incurred wholly and exclusively for the purposes of the Taxable Person's Business (which is not capital in nature) is deductible for Corporate Tax purposes.^[122]

1. Salary and bonus paid to directors who are shareholders:

   Shareholders Mr A and Mr B are executive directors of Company F, involved in the day-to-day operations of the company and have signed an employment contract with Company F. The salary and variable pay to such director-shareholders is as per prevailing industry standards. Amounts paid are for the services rendered by Mr A and Mr B to Company F in their capacity as executive directors and not as shareholders.

   Accordingly, the amounts paid to the executive directors as employees will be considered as incurred wholly and exclusively for the Business of Company F, and hence, deductible expenditure i.e. no adjustment is required to the Accounting Income while determining the Taxable Income in relation to the AED 5,000,000 paid to the directors. It is assumed for the purpose of the example that the payment to director- shareholders is at arm's length.

2. Employee benefits (for home working):

   Company F employs certain professionals who are required to exclusively work from home. Company F agrees to reimburse the increased associated cost for such employees (such as home office set up, and part of the utility bills).

   The cost incurred for the employees' home working will be considered as incurred wholly and exclusively for the Business of Company F, and hence deductible expenditure, i.e. no adjustment is required to the Accounting Income while determining the Taxable Income in relation to home-office expenses of AED 500,000.

3. Local taxes

   Company F has paid local taxes of AED 500,000 in relation to property tax and municipal tax with respect to its business premises. This expenditure is incurred by Company F wholly and exclusively for the purposes of its Business.^[123]

   Such local taxes are not in the nature of Corporate Tax, which is specifically treated as a non-deductible expenditure.^[124] Hence, such local taxes will be deductible, and no further adjustment is required.

Capital vs revenue expenditure

As noted in Section 4.5.6, capital expenditure is expenditure that creates an enduring benefit to a Business and is not deductible for Corporate Tax purposes.

Company F has incurred capital expenditure of AED 700,000 in relation to certain low value, high volume medical equipment that has a useful life of 2 years. Company F's accounting policy is not to capitalise low value capital items and, therefore, this expenditure is recorded as an expense in the income statement. Thus, this expenditure is not treated as capital expenditure for accounting purposes by Company F. In the circumstances, this expenditure should be deductible in the year in which it is incurred. If the medical equipment was capitalised, the cost of acquisition would not be deductible. However, the depreciation in relation to such equipment would be deductible.

Licence fees for the use of specific software for one year will be revenue expenditure in the absence of any enduring benefit. Hence, the AED 900,000 is deductible, and no adjustment is required.

Expenditure not incurred for the purpose of Business

As noted in Section 4.5.1, if expenditure is not incurred for the purpose of the Taxable Person's Business, then it is disallowed i.e. it must be added back when determining Taxable Income.^[125]

Company F has purchased items on behalf of its subsidiary. Accordingly, AED 700,000 that is not incurred for the Business of Company F is disallowed while determining Taxable Income, assuming there is no reimbursement of expenditure by the subsidiary to Company F.

If there was a partial reimbursement of expenditure by the subsidiary to Company F, then only the amount that is not reimbursed would be disallowed in the hands of Company F as it was not incurred for the Business of Company F.

Further, Company F has incurred AED 200,000 for the entertainment of shareholders' family members. Since this expenditure is not incurred for the Business of Company F, it is disallowed.

Expenditure incurred for more than one purpose

As noted in Section 4.5.4, if expenditure is incurred partly for Business purposes and partly for some other purpose, the amount must be apportioned so that only the part relating to the derivation of Taxable Income will be allowed as a deduction.

1. Employee travel expenditure:

   Company F has incurred AED 70,000 on travel expenses for its employees, AED 20,000 of which relates to personal travel by employees during weekends or non- working hours. However, since the entire expenditure of AED 70,000 is incurred for the benefit/wellbeing of the employees, i.e. as part of the company's efforts to reward/retain the employees, it is directly connected to the Business of Company F. Therefore, the whole cost will be considered to be incurred for the purpose of the Business of Company F - in the same way as a fair market employee benefit, for instance - and hence, will be allowed as a deduction, i.e. no adjustment is required while determining Taxable Income, provided the aggregate amount is in line with the arm's length standard.

2. Shared employee cost:

   Company F has incurred AED 2,000,000 towards Ms K's salary cost (including housing allowance, health insurance for employee and their dependents, air travel allowance for employee and their dependents, etc.). Ms K spends 30% of her time working for Company Q. From the total salary of Ms K, i.e. AED 2,000,000, an apportionment based on the time spent working for Company F and Company Q will mean that AED 1,400,000 (70% of AED 2,000,000) will qualify as Business expenditure related to Company F's Business. The remaining AED 600,000 (30% of AED 2,000,000) will not be allowed as Business expenditure. Accordingly, AED 600,000 will be disallowed, i.e. added back, while determining the Taxable Income of Company F, unless this cost is recharged to Company Q at arm's length.

Entertainment expenditure

Company F has incurred entertainment expenditure of AED 1,600,000. As per the specific rules in relation to entertainment expenditure, as noted in Section 4.5.10:

1. AED 900,000 for entertainment of company employees would be 100% deductible.

2. AED 500,000 for entertainment of business partners would be 50% deductible, i.e. AED 250,000.

In addition, as noted in Section 5.3.3, AED 200,000 for entertainment for shareholders' families is disallowed as not being incurred for the purpose of Business.

Accordingly, the following expenditure is disallowed, i.e. added back, while determining Taxable Income:

1. AED 250,000 relating to entertainment expenditure for business partners.

2. AED 200,000 relating to entertainment expenditure for shareholders' families. (see Section 5.3.3)

Donations, gifts

As noted in Section 4.5.9, donations, grants or gifts made to a Person other than a Qualifying Public Benefit Entity are non-deductible expenditure for Corporate Tax purposes.^[126]

Accordingly, AED 700,000 relating to donations and gifts made to Persons other than a Qualifying Public Benefit Entity are disallowed, i.e. added back, while determining Taxable Income.

Fines, penalties and compensation

• Fines, penalties:

  As noted in Section 4.5.1 the deductibility of any expenditure will depend on whether it is incurred wholly and exclusively for the purposes of the Business.

  If the payment is for infraction/breach of any laws, rules or regulations or is imposed as punishment, then it will not be allowable for Corporate Tax purposes, for example, fines and penalties levied by a statutory body/government. It does not matter if such fines or penalties are incurred in the normal course of Business, they will be disallowed for Corporate Tax purposes.

  Thus, as noted in Section 4.5.9, payment of fines or penalties, other than compensation for damages or breach of contract, is not deductible expenditure.^[127]

  Company F has paid AED 20,000 relating to speeding fines levied on the company employees, which were incurred during the performance of the employees' work. Given the nature of expenditure is a fine/penalty due to the infraction of law, it is non- deductible expenditure.

• Compensation for damages or breach of contract:

  Generally, where the payment is intended to provide restitution for damages caused by virtue of normal/day-to-day Business operations, then it will be allowable as a deduction for Corporate Tax purposes, for example, compensation paid to a customer for breach of contract.

  Expenditure relating to breach of customer contract (AED 600,000), compensation paid to customers (AED 900,000) and professional fees for defending a lawsuit filed by a customer for legal claims (AED 400,000) pertains to the normal/day-to-day Business operations of Company F. These amounts (i.e. compensation and professional fees to defend lawsuits) are deductible for Corporate Tax purposes and so no adjustment is required when determining Taxable Income.

Bribes, illicit payments

No deduction is allowed for bribes or other illicit payments even if the expenditure is recorded as a cost under accounting principles.^[128] In this example, the expenditure of AED 2,000,000 relates to inappropriately seeking to influence a customer's employee to award a contract to Company F. Such a payment, even if wholly incurred for Business purposes, is in the nature of a bribe, and is non-deductible for Corporate Tax purposes i.e. added back when determining Taxable Income.

Payments to Connected Persons

Payments to Connected Persons, which includes an owner or director, are only deductible to the extent they represent Market Value for the service or benefit provided.^[129]

Company F entered into a lease agreement for office space with shareholder Mr A which is at Market Value. As long as this is purely for the Business of Company F and at a Market Value rate, no adjustment is required in relation to rent paid to the shareholder of AED 900,000.

Input Value Added Tax

As noted in Section 4.5.9, no deduction is allowed for Input Value Added Tax incurred by a Taxable Person that is recoverable.^[130] However, irrecoverable Input Value Added Tax is allowed as a deduction as it represents a permanent cost to the Business, provided the underlying expenditure meets the general rules of deduction i.e. it is incurred wholly and exclusively for the purposes of the Business. Accordingly, irrecoverable Input Value Added Tax of AED 150,000 that is incurred wholly and exclusively for the purposes of the Business will be allowed as a deduction while determining the Taxable Income.

If Input Value Added Tax is levied on expenditure that does not qualify as deductible expenditure for Corporate Tax purposes, it will also not be deductible. For example, any Input Value Added Tax on personal (non-Business) expenditure is not deductible.

In the event that recoverable Value Added Tax had been recorded as an expense in the accounts, it will not be deductible i.e. it is required to be added back when determining Taxable Income if it has been recorded as an expense.

Contributions to a private pension fund

As noted in Section 4.5.9, an employer can claim a deduction for contributions made to a private pension fund in respect of its employees who are Pension Plan Members in the Tax Period in which such contributions are 'paid'.^[131] However, an employer may not claim a deduction for contributions exceeding 15% of an employee's total remuneration for the relevant Tax Period. ^[132] Thus, in order to be deductible, the relevant contribution must be actually paid in the relevant Tax Period and must not exceed this 15% threshold. Therefore, any unpaid contributions and any excess contributions (i.e. contributions exceeding 15% of the employee's total remuneration) will not be allowed as a deduction.

Accordingly, of the AED 3,000,000 pension fund cost, only the unpaid contribution of AED 1,000,000 will be disallowed, i.e. added back, when determining Taxable Income. The balance of AED 2,000,000 that was paid by Company F is within the threshold of 15% of each employee's total remuneration and so is deductible.

Expenses incurred prior to commencement of Business

As noted in Section 4.5.7, subject to any specific restrictions, the general rule is that any expenditure incurred wholly and exclusively for the Business is allowed as a deduction in the Tax Period in which it is incurred.^[133]

Mr A and Mr B, shareholders of the company, incurred pre-incorporation expenditure in relation to professional fees, registration fees, etc. to incorporate Company F. Such costs are reimbursed to Mr A and Mr B by Company F and in accordance with IFRS are expensed by Company F in its first Financial Year, i.e. the current Tax Period. Accordingly, no adjustment is required to be made in relation to the pre-incorporation expenses of AED 500,000 when determining Taxable Income.

Creation and reversal of provisions

As noted in Section 4.5.8, if a Taxable Person is carrying a provision in its Financial Statements in accordance with the applicable Accounting Standards (i.e. IFRS or IFRS for SMEs), any movement in the provision will be taken into account in the determination of Taxable Income and be deductible, if applicable, as long as it relates to an expense which would be deductible under the Corporate Tax Law.

If such a provision is released or reversed in the following Tax Period, there are no specific adjustments required to be made with regards to the release or reversal. Therefore, the relevant credit to the Financial Statements will be treated as Taxable Income for Corporate Tax. However, if a provision is made in relation to expenditure that is disallowable under the Corporate Tax Law, it will not be allowed as a deduction while determining Taxable Income.

Accordingly, no adjustment is required when determining Taxable Income for:

• Provision for bad debts of AED 500,000, and

• Provision for customer warranties of AED 600,000 (customer warranties in relation to sale of various medical equipment).

However, Company F has also made a provision for fines and penalties of AED 1,000,000 on the expectation that the same will be levied by the statutory body regulating the healthcare industry. Since the provision is for an underlying expense which is non-deductible under the Corporate Tax Law, i.e. fines and penalties, it will not be allowed as a deduction while determining Taxable Income and, hence, is required to be added back.

Adjustments in relation to Exempt Income

As noted in Section 4.4.2.1, Dividends from a Participating Interest in a foreign juridical person are exempt.^[135] Accordingly, the Dividends of AED 20,000,000 (in 2025) and AED 25,000,000 (in 2026) received from Company H are disregarded, i.e. deducted.^[136]

Adjustment in relation to expenditure incurred in deriving Exempt Income

As noted in Section 4.5.3, expenditure (except Interest expenditure) incurred in relation to deriving Exempt Income is not deductible when determining the Taxable Income.^[137]

Company G has incurred professional fees which relate to a Participating Interest that will give rise to Exempt Income. Accordingly, the professional fees of AED 7,500,000 in 2025 are added back.

Interest expenditure of AED 10,000,000 (in 2025) and AED 8,000,000 (in 2026) on the acquisition and holding of Participating Interests is not required to be added back. It is deductible subject to the General Interest Deduction Limitation Rule.^[138]

Specific Interest Deduction Limitation Rule

As noted in Section 4.7, the Specific Interest Deduction Limitation Rule prohibits deduction of Interest expenditure incurred on a loan obtained directly or indirectly from a Related Party for, inter alia, Dividend or profit distribution to a Related Party^[139] if the Related Party receiving the Interest is not subject to Corporate Tax, or a similar tax in a foreign country at a rate of at least 9%, on the Interest income.^[140]

In this case, Company G has incurred Interest expenditure on a loan from a Related Party, i.e. Company I, that is not subject to Corporate Tax in the UAE or in Country I. Furthermore, Company G has utilised the borrowed funds to pay Dividends to its shareholder, i.e. Company J. Accordingly, Interest expenditure of AED 28,000,000 (in 2025) and AED 30,000,000 (in 2026) on the loan obtained from Company I will be fully disallowed by the Specific Interest Deduction Limitation Rule.^[141]

Such Interest will not form part of Net Interest Expenditure when applying the General Interest Deduction Limitation Rule^[142] (see Section 6.3.4.1).

General Interest Deduction Limitation Rule

As noted in Section 4.6.2, when the Net Interest Expenditure exceeds AED 12 million in a Tax Period, as per the General Interest Deduction Limitation Rule, the amount of deductible Net Interest Expenditure is the greater of:

• 30% of adjusted EBITDA for a Tax Period and,

• The de minimis threshold of AED 12 million.^[143]

Considering the above, to determine the deductible Interest expenditure, ^[144] the following components need to be calculated:

• Net Interest Expenditure, and

• 30% of adjusted EBITDA.

Exempt Income: Participation Exemption

As noted in Section 4.4.2.2, gains or losses on the disposal of a Participating Interest (or part thereof) are excluded from Taxable Income. Similarly, foreign exchange gains or losses in relation to a Participating Interest are excluded while determining the Taxable Income.^[153]

Accordingly, the loss on sale of shares of Company M of AED 1,000,000 and the foreign exchange loss of AED 2,000 on the sale of shares of Company M for the 2026 Tax Period are added back.

Exempt Income: Foreign Permanent Establishment

The Foreign Permanent Establishment exemption is available for the following reasons:

• The Foreign Permanent Establishment is subject to Corporate Tax at a rate of not less than 9% (i.e. 10% in Country L in this case).^[154]

• No Tax Loss from the Foreign Permanent Establishment has previously been utilised.^[155]

Company K has, therefore, made an election in the 2025 and 2026 Tax Periods to exclude the net profits and losses of its Foreign Permanent Establishment while determining its Taxable Income for Corporate Tax purposes. Accordingly, the following adjustments are made to Company K's Taxable Income calculation:

• The net loss of AED 2,550,000 incurred during the 2025 Tax Period is added back, and

• The net income of AED 950,000 earned during the 2026 Tax Period is deducted.

A credit for foreign tax paid by Company K on its Country L operations is not available where an election for the Foreign Permanent Establishment exemption has been made.^[156]

Tax Loss relief

As noted in Section 4.8, a Taxable Person can carry forward a Tax Loss and offset it against Taxable Income in subsequent Tax Periods, subject to meeting certain conditions. ^[157] The Tax Loss carried forward can be used to reduce the Taxable Person's income in the Tax Period by a maximum of 75% of that Taxable Income.

The Taxable Income of Company K in this case for the 2026 Tax Period is AED 12,500,000. Accordingly, Company K can utilise AED 9,375,000 of Tax Loss to offset its Taxable Income (i.e. 75% of AED 12,500,000).^[158] Considering the above, the Tax Loss relief and Tax Loss carried forward for Company K is as follows (amounts in AED):

Additionally, the Tax Loss relating to the Foreign Permanent Establishment cannot be offset against the UAE operations given that Company K has elected for the Foreign Permanent Establishment exemption.^[159]

General Interest Deduction Limitation Rule

As noted in Section 6 (Case Study 2), as per the General Interest Deduction Limitation Rule, when the Net Interest Expenditure exceeds AED 12,000,000 in a Tax Period, the amount of deductible Net Interest Expenditure is the greater of:

• 30% of adjusted EBITDA, and

• The de minimis threshold of AED 12,000,000.

Considering the above, to determine the deductible Interest expenditure ^[160] , the following components need to be calculated:

• Net Interest Expenditure,^[161] and

• 30% of adjusted EBITDA.

Calculation of Net Interest Expenditure

As noted in Section 4.6.2, the Net Interest Expenditure is the difference between the amount of Interest expenditure incurred (including any carried forward Net Interest Expenditure) and the Interest income derived during a Tax Period. Considering the above, calculation of Net Interest Expenditure for Company N for the 2025 and 2026 Tax Periods is as follows:

Calculation of 30% adjusted EBITDA

For the purposes of the General Interest Deduction Limitation Rule, EBITDA for a Tax Period is the Taxable Income calculated in accordance with the general rules for determining Taxable Income as per Article 20 of the Corporate Tax Law, i.e. all adjustments are required to be made except for adjustments in relation to the General Interest Deduction Limitation Rule and Tax Loss relief provisions. This Taxable Income (or loss) before the General Interest Deduction Limitation Rule and Tax Loss relief is increased by the following, to arrive at the 'adjusted EBITDA' for the purposes of the General Interest Deduction Limitation Rule:

• Net Interest Expenditure for the relevant Tax Period,

• Depreciation and amortisation expenditure taken into account in determining the Taxable Income for the relevant Tax Period,

• Any Interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022, and

• Any Interest income or expenditure relating to Qualifying Infrastructure Projects.

If the adjusted EBITDA, as per the above, results in a negative amount, then the adjusted EBITDA will be considered to be AED 0.^[162]

Considering the above, the calculation of adjusted EBITDA for the purposes of the General Interest Deduction Limitation Rule for the 2025 and 2026 Tax Periods for Company N is as follows (amounts in AED):

Determining deductible and non-deductible Net Interest Expenditure

As noted above, the deductible Net Interest Expenditure is the greater of:

• 30% of adjusted EBITDA, and

• The de minimis threshold of AED 12,000,000.

If the adjusted EBITDA, as per the above, results in a negative amount, then the adjusted EBITDA will be considered to be AED 0.^[163]

Considering the above, the calculation of the deductible and non-deductible Net Interest Expenditure for the 2025 and 2026 Tax Periods for Company N is as follows:

2025 Tax Period:

Company N's Net Interest Expenditure of AED 15,500,000 (see Section 8.3.2) is deductible up to the greater of 30% of its adjusted EBITDA, i.e. zero (see Section 8.3.3), or the de minimis of AED 12,000,000. Thus, AED 12,000,000 is the maximum deductible Net Interest Expenditure in 2025. Therefore, the adjustment to the Accounting Income in relation to Net Interest Expenditure is as follows (amounts in AED):

Company N's Net Interest Expenditure in 2025 is AED 15,500,000, of which it can deduct only AED 12,000,000 in the 2025 Tax Period. Accordingly, AED 3,500,000 (AED 15,500,000 minus AED 12,000,000) can be carried forward to the subsequent 10 Tax Periods.^[164]

2026 Tax Period:

Company N's Net Interest Expenditure deductible is AED 17,500,000 that includes:

• Current year Net Interest Expenditure of AED 14,000,000; and

• The disallowed/carried forward Net Interest Expenditure from the 2025 Tax Period of AED 3,500,000.

Company N's Net Interest Expenditure deductible of AED 17,500,000 for the 2026 Tax Period is deductible up to the greater of 30% of its adjusted EBITDA i.e. AED 17,700,000 (see Section 8.3.3) or the de minimis of AED 12,000,000. Hence, Company N can deduct its entire Net Interest Expenditure of AED 17,500,000 in 2026. Therefore, the adjustment to the Accounting Income in relation to Net Interest Expenditure is as follows (amounts in AED):

Thus, in 2026, Company N obtains relief for all of the Interest disallowed in 2025, as well as its 2026 Net Interest Expenditure.

Determining Tax Loss relief and Tax Loss carried forward

As noted in Section 7 (Case Study 3), a Tax Loss can be used to reduce Taxable Income in future Tax Periods (provided the necessary conditions are met).^[165] The Tax Loss carried forward can be used to reduce the Taxable Person's income in the Tax Period by a maximum of 75% of the Taxable Income for that Tax Period.^[166]

The Tax Loss incurred in the 2025 Tax Period is AED 29,000,000. Accordingly, Company N can set off AED 22,500,000 against its Taxable Income of the 2026 Gregorian calendar year (75% of AED 30,000,000). The unutilised Tax Loss of AED 6,500,000 can be carried forward to subsequent Tax Periods indefinitely.^[167]

Conditions for transfer of Tax Loss

As noted in Sections 4.8.1 and 4.8.3, a Taxable Person must first offset the Tax Loss against its own Taxable Income before it can be transferred to another Taxable Person or carried forward to subsequent Tax Periods. If in any Tax Period the Taxable Person is unable to offset the Tax Loss against its own Taxable Income, then it can transfer the Tax Loss to another Taxable Person or carry forward the Tax Loss (subject to meeting the necessary conditions).^[168]

1. In 2024, Company O incurred a Tax Loss. It can transfer its 2024 Tax Loss as follows:

   • Company P: AED 7,500,000 i.e. 75% of Company P's Taxable Income of AED 10,000,000, and

   • Company Q: AED 3,750,000 i.e. 75% of Company Q's Taxable Income of AED 5,000,000.

   The remaining Tax Loss will be carried forward to 2025 by Company O, as follows (amounts in AED):

   2024: Details of Tax Loss	Company O
   Tax Loss incurred in 2024	40,000,000
   Less: Tax Loss transferred to Company P	(7,500,000)
   Less: Tax Loss transferred to Company Q	(3,750,000)
   Tax Loss carried forward to 2025	28,750,000

2. For 2025, as noted above, Company O must use the carried forward Tax Loss to offset its own Taxable Income up to 75% of that Taxable Income for 2025 (i.e. AED 7,500,000) before any remaining Tax Loss can be transferred to group companies as follows:

   • Company P: AED 3,000,000 i.e. 75% of Company P's Taxable Income of AED 4,000,000, and

   • Company Q: AED 6,000,000 i.e. 75% of Company Q's Taxable Income of AED 8,000,000

   The remaining Tax Loss will be carried forward to 2026 by Company O, illustrated as follows (amounts in AED):

   2025: Details of Tax Loss	Company O
   Tax Loss brought forward from 2024	28,750,000
   Less: Tax Loss utilised in 2025 by Company O	(7,500,000)
   Less: Tax Loss transferred to Company P	(3,000,000)
   Less: Tax Loss transferred to Company Q	(6,000,000)
   Tax Loss carried forward to 2026	12,250,000

Limitation on Tax Loss carried forward

As noted in Section 4.8.2, a Tax Loss can be carried forward by a Taxable Person provided the owners of the Taxable Person continuously hold at least 50% ownership from the start of the period in which the Tax Loss is incurred, to the end of the Tax Period in which the Tax Loss is used to offset against Taxable Income, or the same or similar Business is carried on following the change in ownership.^[169]

In the 2026 Tax Period, the owners of Company O cease to hold at least 50% ownership interest. Additionally, there is also a change in the Business of Company O. Since Company O fails to meet the required conditions discussed above, it cannot utilise, transfer or carry forward the remaining Tax Loss of AED 12,250,000 and so it will be forfeited.

Cash Basis of Accounting

As noted in Section 4.1, for Corporate Tax purposes, the accounting net profit or loss as stated in the Financial Statements of a Taxable Person forms the starting point for determining their Taxable Income.

The financial accounting method adopted by the Taxable Person will determine when income and expenditure is recognised in the Financial Statements. Taxable Persons that earn Revenue that does not exceed AED 3,000,000 can follow the Cash Basis of Accounting wherein the income and expenditure is recognised when cash payments are actually received or paid.

Calculation of Revenue

Revenue is defined in the Corporate Tax Law as 'the gross amount of income derived during a Tax Period'.^[173] Revenue is not restricted to the sale of goods or services by a Business. It includes all income earned in the Tax Period and will include, for example, income from sale of assets, Exempt Income, etc.

Revenue is different from profit. Profit is the difference between Revenue of a Business and its expenditure. Only Revenue, not expenditure, is relevant to determine eligibility to adopt the Cash Basis of Accounting.

Businesses that are registered for VAT are required to charge VAT on certain products or services that they sell. The VAT charged should not be included in the calculation of Revenue. This is because the VAT collected must be transferred to the FTA and does not belong to the Business.

The Cash Basis of Accounting does not alter the nature of payments. For example, the receipt of a loan or repayment of loan (principal amount) is not Revenue or expenditure (though the Interest element on such loans will be taxable or deductible subject to normal rules). Accordingly, the loan of AED 1,500,000 received by Company V during the 2025 Gregorian calendar year should not be included in the calculation of Revenue.

As Company V's Revenue does not exceed AED 3,000,000, it is eligible to adopt the Cash Basis of Accounting.

Income and expenditure recognised on a payment basis

As noted above, under the Cash Basis of Accounting, income and expenditure are recognised when cash payments are actually received or paid.

If Company V has received any income in the current Tax Period that relates to previous Tax Periods (i.e. late receipts) or future Tax Periods (i.e. advance receipts), such receipts will be deemed to be the Revenue of the current Tax Period. Accordingly, the following income will be taken into account for Corporate Tax purposes in the 2025 Gregorian calendar year, i.e. the year of receipt even if services are not performed by Company V in the same Tax Period:

• Income received in advance of AED 700,000 for services yet to be rendered by Company V, and

• Income received late (i.e. late payment from customers) of AED 300,000 for services rendered by Company V in the 2024 Gregorian calendar year.

Similarly, if Company V has made payments in the current Tax Period that relate to previous Tax Periods (i.e. late payments) or future Tax Periods (i.e. advance payment), such payments will be treated as expenditure of the current Tax Period. Accordingly, the following expenditure will be taken into account for Corporate Tax purposes in the 2025 Gregorian calendar year, i.e. the year of payment even if services are not received by Company V in the same Tax Period:

• Salary relating to the 2024 Gregorian calendar year of AED 290,000, and

• Rent relating to the 2026 Gregorian calendar year of AED 174,000.

No adjustment is required in relation to the above items of income and expenditure while determining the Taxable Income. The starting point for determination of Taxable Income of Company V will be the Accounting Income of AED 577,050.

Exempt Income: Dividend from Resident Person

As noted in Section 4.4.1, Dividends and other profit distributions received from a Resident Person that is a juridical person are exempt from Corporate Tax.^[174] There are no additional conditions in order to benefit from this exemption.

Accordingly, the Dividend of AED 45,000 received from Company W is disregarded (i.e. it is deducted) when determining the Taxable Income.

Entertainment expenditure

Company V has incurred entertainment expenditure of AED 95,700 out of which AED 40,600 relates to business partners. As per the specific rules in relation to entertainment expenditure, as noted in Section 4.5.10, 50% of the entertainment expenditure incurred in relation to business partners will be disallowed i.e. AED 20,300 (i.e. 50% of AED 40,600).

Contribution to private pension fund

As noted in Section 4.5.9, an employer can claim a deduction for contributions made to a private pension fund in respect of its employees who are Pension Plan Members in the Tax Period in which such contributions are 'paid'.^[175] However, an employer may not claim a deduction for contributions exceeding 15% of an employee's total remuneration for the relevant Tax Period.^[176]

Accordingly, the excess contribution of AED 130,000, though actually paid by Company V, will be disallowed, i.e. added back, when determining Taxable Income.

Capital expenditure

As noted in Section 4.5.6, capital expenditure is expenditure that creates an enduring benefit to a Business and is not deductible for Corporate Tax purposes. However, the depreciation of the costs of capital assets is a deductible expense for Corporate Tax purposes.

Depreciation is an accounting concept which allows for the cost of an asset to be spread over the life of the asset (representing the reduction of the asset's value), even though there is no cash outlay to the Business.

However, Taxable Persons that apply the Cash Basis of Accounting do not consider any notional items (i.e. without any cash outlay) in their books of accounts such as depreciation. Income and expenditure are recorded only when payment is actually made or received. Hence, under the Cash Basis of Accounting, a deduction may be taken in respect of assets purchased. This replaces the tax relief which would ordinarily be given for depreciation on the Accrual Basis of Accounting (as no depreciation is recorded under the Cash Basis of Accounting).

In this case, Company V has purchased computers for AED 600,000 and this will be treated as an allowable deduction for Corporate Tax purposes, even though it is capital in nature as Company V follows the Cash Basis of Accounting. Therefore, no adjustment is required to the Accounting Income while determining the Taxable Income in this regard.

Interest expenditure

Interest expenditure can be deducted when calculating Taxable Income for the Tax Period in which it is incurred^[177] (or 'paid' in case the Taxable Person follows the Cash Basis of Accounting), subject to the General and Specific Interest Deduction Limitation Rules.^[178]

If the Net Interest Expenditure is below the AED 12,000,000 de minimis threshold for a Tax Period, the General Interest Deduction Limitation Rule does not apply. ^[179] However, should the Interest expenditure of a Taxable Person that follows the Cash Basis of Accounting exceed AED 12,000,000 then the General Interest Deduction Limitation Rule will apply.

Unrealised gains and losses

As noted in Section 4.1, Businesses who prepare their Financial Statements on an Accrual Basis of Accounting may elect to take into account gains and losses on a realisation basis.

Company A has elected to take into account relevant gains or losses on a realisation basis (i.e. on disposal/transfer) for all assets and liabilities that are subject to fair value or impairment accounting as per IFRS.^[182] Accordingly, the following items relating to unrealised gains or losses that form part of the Accounting Income should be adjusted when determining the Taxable Income:

1. Unrealised gain on land of AED 1,000,000 should be deducted,

2. Unrealised loss on inventory of AED 1,200,000 should be added back, and

3. Impairment loss on shares of Company D of AED 900,000 should be added back (i.e. non-deductible).

The result is that a net unrealised loss of AED 1,100,000 should be added back to the Accounting Income to determine the Taxable Income.

The impairment loss on shares of AED 900,000 could equally be treated as non- deductible in terms of Article 23(5)(d) of the Corporate Tax Law because it relates to a Participating Interest (Company D is a Participating Interest of Company A).

Exempt Income: Dividend from Resident Person

As noted in Section 4.4.1, Dividends and other profit distributions received from a Resident Person that is a juridical person are exempt from Corporate Tax^[184] . There are no additional conditions in order to benefit from this exemption.

Accordingly, the Dividend of AED 500,000 received from Company B is disregarded (i.e. it is deducted) when determining Taxable Income.

Exempt Income: Participation Exemption

As noted in Section 4.4.2.1, Dividends and other profit distributions received from foreign juridical persons are exempt from Corporate Tax if the recipient has a Participating Interest in the foreign company (i.e. they will not be taken into account when determining Taxable Income).^[185]

Accordingly, the Dividend of AED 500,000 received from Company C is disregarded (i.e. it is deducted) when determining Taxable Income.

Non-deductible expenditure: expenditure incurred in deriving Exempt Income

As noted in Section 4.5.3, expenditure incurred in relation to deriving Exempt Income is not deductible when determining Taxable Income.^[186]

Company A has incurred due diligence fees and commission of AED 1,000,000 in acquiring the shares in Company C and Company D. The shareholdings are Participating Interests, and the income Company A earns from them is Exempt Income. Accordingly, the expenditure incurred of AED 1,000,000 will be disallowed when determining Taxable Income. Instead, this expenditure should be capitalised as part of the acquisition cost of the Participating Interest.^[187]

Non-deductible expenditure: depreciation of capitalised expenditure

As noted in Section 4.5.6, depreciation of capitalised expenditure, which is otherwise not deductible, will not be deductible while calculating Taxable Income.

Company A has paid professional fees to a Connected Person that is not at arm's length. This payment has been capitalised as part of the cost of the asset in accordance with the relevant Accounting Standards as it is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating. During the year, the depreciation charge in respect of this is AED 500,000. Since, the portion of the payment (professional fees in this case) to a Connected Person that is not arm's length will not be deductible for Corporate Tax purposes, the corresponding element of the depreciation charge relating to the capitalised amount is likewise disallowed when determining Taxable Income.

Unrealised gains and losses

As noted in Section 11.3.1, Company A has made an election to consider all gains or losses on a realisation basis for assets and liabilities subject to fair value or impairment accounting under IFRS.

Company A has total unrealised loss on inventory of AED 1,900,000 out of which AED 700,000 relates to the Foreign Permanent Establishment, i.e. Branch E.

Accordingly, the unrealised loss on inventory of AED 1,200,000 that is in relation to the UAE operations should be added back to the total Accounting Income while determining the Taxable Income of Company A.

Transaction with Related Party

As noted in Section 4.4.3, transactions between a Foreign Permanent Establishment and Related Parties (i.e. Company B in this case) are required to be treated as if they have taken place at Market Value. The cost of free products, having a Market Value of AED 2,000,000, should be adjusted for in determining the Taxable Income of Company A.

Note a corresponding adjustment will be made while determining the Taxable Income of Company B (i.e. AED 2,000,000 will be added to its Accounting Income).

As explained below, the income and expenditure (adjusted for any Related Party transactions) of the Foreign Permanent Establishment must be disregarded on the basis that Company A has elected to apply the Foreign Permanent Establishment Exemption.

Exempt Income: Foreign Permanent Establishment

As noted in Section 4.4.3, the Foreign Permanent Establishment exemption is available if the following conditions have been satisfied:

• Foreign Permanent Establishment is subject to Corporate Tax at a rate of not less than 9% (i.e. 10% in Country E).^[189]

• No Tax Loss from the Foreign Permanent Establishment has previously been utilised.^[190]

As the above conditions are satisfied, Company A has elected for the Foreign Permanent Establishment exemption in relation to Branch E. Accordingly, the income and associated expenditure of Branch E must be calculated as if Branch E is a separate and independent Business in accordance with internationally accepted profit attribution methods, such as the separate entity approach, and any transactions which take place between Branch E and its head office or Related Parties (Company B in this case) must be treated as having taken place at Market Value.^[191] Thus, the cost of the free products referred to above, having a Market Value of AED 2,000,000, should be included as a cost in the hands of the Foreign Permanent Establishment (Branch E). Such income and associated expenditure should then be excluded from Company A's Accounting Income in the determination of its Taxable Income.

Thus, as Company A has elected to apply the Foreign Permanent Establishment Exemption, the Accounting Income, i.e. exempt income of AED 5,260,000 (being Accounting Income of AED 7,260,000 less the transfer pricing adjustment of AED 2,000,000) of the Foreign Permanent Establishment should be excluded while determining the Taxable Income of Company A.

Thus, net income (that is treated as Exempt Income) of the Foreign Permanent Establishment of AED 5,260,000 is deducted when determining the Taxable Income of Company A.

Foreign Tax Credit

As noted in Section 4.4.3, making an election for the Foreign Permanent Establishment exemption means that no Foreign Tax Credit is available.^[192]

Accordingly, no credit for taxes paid of AED 726,000 in Country E with respect to the Foreign Permanent Establishment, i.e. Branch E, will be available to Company A in the UAE.

Determining Foreign Tax Credit available to offset Corporate Tax liability

As noted in Section 4.9.1, Corporate Tax Payable can be reduced by a Foreign Tax Credit in respect of the same Tax Period,^[193] provided the foreign source income is not exempt for Corporate Tax purposes, i.e. the pre-tax foreign income is included in the Taxable Income. In this case, Company A has not elected for the Foreign Permanent Establishment exemption, i.e. the income and associated expenditure forms part of the Taxable Income and, hence, Company A can claim Foreign Tax Credit.

As noted in Section 4.9.2, the amount of Foreign Tax Credit cannot exceed the amount of Corporate Tax due on the foreign source income.^[194]

Thus, the amount of Foreign Tax Credit that can be offset against the Corporate Tax liability in case of Company A is AED 522,954 which is lower of the following:

1. The actual amount of tax paid on foreign source income in the foreign jurisdiction (i.e. AED 726,000);

2. The amount of the Corporate Tax due on the net foreign source income (i.e. AED 522,954) which is calculated as follows:

   Corporate Tax due on foreign source income = X * Y Z

   where:

   X = Corporate Tax due on total Taxable Income of the Taxable Person before any Foreign Tax Credit (i.e. AED 1,312,650),

   Y = Relevant net foreign source income (i.e. AED 5,960,000)

   Z = Total Taxable Income of the Taxable Person (i.e. AED 14,960,000).

Unutilised Foreign Tax Credit

As noted in Section 4.9.3, Foreign Tax Credit cannot be carried forward or back.^[195] No refund is available for unutilised Foreign Tax Credit.

Accordingly, even though Company A has incurred tax of AED 726,000 on its Branch E operations in foreign jurisdictions, the unutilised portion of AED 203,046 (AED 726,000 less AED 522,954) will be forfeited.

Income attributable to a Permanent Establishment

A Non-Resident Person that conducts Business in the UAE through a Permanent Establishment is subject to Corporate Tax on the Taxable Income that is attributable to such Permanent Establishment.

A Person and its Permanent Establishment are treated as Related Parties. ^[196] Accordingly, as noted in Section 4.10, when determining the Taxable Income of a Non- Resident Person with a Permanent Establishment in the UAE, the UAE Permanent Establishment, though an extension of the Non-Resident Person, will be treated as a separate and independent entity. Transactions between such Non-Resident Person's head office and its UAE Permanent Establishment need to be conducted in line with the arm's length standard.

In this case, since Company N has a Permanent Establishment in the UAE, it is required to attribute appropriate income and associated costs to the Permanent Establishment in accordance with the arm's length standard.

Accordingly, when determining the Taxable Income of Company N, all the income and associated expenditures that are directly related to the UAE Permanent Establishment are required to be considered:

• Revenue from construction contract: AED 30,000,000

• Cost of goods sold AED 21,000,000, and

• Salary and wages: AED 4,500,000.

Head office expenses

In addition to the above, Company N incurs expenditure on administrative staff, IT infrastructure, centralised services like HR and legal functions in Country N for all its operations, including operations in the UAE.

Company N allocates these centralised costs across all its operations on an arm's length basis. Accordingly, Company N has allocated AED 1,500,000 as head office expenses for its UAE operations.

Considering the head office expenses are incurred for the purposes of Company N's Business in the UAE, the allocated amount is allowable expenditure for Corporate Tax purposes. Hence, no adjustment is required in relation to head office expenses of AED 1,500,000 when determining the Taxable Income.

Income attributable to nexus in the UAE

A Non-Resident Person that has a nexus in the UAE by way of an Immovable Property is subject to Corporate Tax on the Taxable Income that is attributable to such Immovable Property.^[197]

Company N has received rental income of AED 2,000,000 from property in the UAE, which creates a nexus for Company N. Accordingly, it will be subject to Corporate Tax. No adjustment is required when determining the Taxable Income as it already forms part of the Accounting Income.

Exempt Income: Dividend from a juridical person that is a Resident Person

As noted in Section 4.4.1, a Dividend received from a juridical person that is a Resident Person is exempt from Corporate Tax.^[198] Accordingly, the Dividend of AED 500,000 is excluded when determining the Taxable Income of Company N.

Non-deductible expenditure

As noted in Section 4.5.9, donations, grants or gifts made to a Person other than a Qualifying Public Benefit Entity are non-deductible expenditure for Corporate Tax purposes.^[199]

Accordingly, AED 700,000 relating to gifts given to business partners of Company N (i.e. that are not given to a Qualifying Public Benefit Entity) are disallowed, and therefore, added back while determining Taxable Income.