Insightful Takeaways From The Latest CT Guide Issued By FTA

(MENAFN- Khaleej Times) In our previous article, we provided a broad overview of the latest corporate tax guide CTGDTI1 issued by the federal Tax Authority (FTA) regarding the determination of taxable income. In this article, we will highlight some key takeaways from the guide.

The corporate tax law mandates that connected persons, such as owners, officers, and directors, must be compensated at market value. I had anticipated that the FTA would provide salary brackets based on industry, business type, revenue etc. However, the guide states that businesses must evaluate the salaries paid to connected persons at arm's length price. Consequently, taxable persons will need to conduct benchmarking studies to determine the fair market value of the salaries paid to these connected persons.

As we understood, accounting depreciation, amortization, depletion, and provisions are permitted for tax purposes, and this is confirmed in the guide. One new point we observed is that if a provision is created before a person becomes a taxable person, any reversal of that provision after they become taxable will be subject to tax. For example, if a provision is created in 2023 and reversed in 2024, the reversal will be taxed when calculating taxable income for 2024. Furthermore, if a provision is made for an item that is not allowable for tax purposes, that provision will also be disallowed. For instance, if a provision is created for the ongoing litigation due to the violation of the law, it will not be permitted for tax purposes based on the like-to-like comparison.

If a taxable person has paid a fine for violating any laws, rules, or regulations, that fine will not be deductible for corporate tax purposes, like over speeding fines are not allowed. However, fines incurred during regular business operations, such as penalties for breach of contract, are allowable for tax purposes.

If net interest exceeds Dh12 million per annum, the taxable person can claim either Dh12 million or 30 per cent of Ebitda (earnings before interest, tax, depreciation and amortization), whichever is greater. The remaining interest can be carried forward for up to ten years. It's important to note that this carryforward interest will affect adjusted Ebitda in future periods and will be included in the net interest for those periods. Interest expenses not subject to these limitations will be fully deductible and will not count toward the Dh12 million threshold but it will be added back while calculating the adjusted Ebitda. The case study 2 shows its pure application in the guide.

Dividends received from a resident juridical person are exempt from tax without any additional conditions. In contrast, dividends from a foreign juridical person are exempt only if the taxable person meets the participation exemption criteria. Additionally, capital gains, impairment gains, and foreign exchange gains are exempt from corporate tax when the participation conditions are satisfied; otherwise, they are subject to tax.

Once the relevant requirements are met, losses can be carried forward indefinitely. Additionally, within a qualifying group, one taxable person can transfer its losses to another. When losses are carried forward or transferred, they can only be adjusted against up to 75 per cent of the recipient's taxable income or future taxable profits, as the case may be. This means that 25 per cent of the taxable income will still be subject to tax, as demonstrated in various case studies in the guide. In the future, if the necessary conditions are not met-such as the taxable person not being part of the qualifying group or lacking continuity of business or ownership-the adjusted losses will not be reversed, and any further carried forward losses will not be eligible for adjustment till the conditions are satisfied.

Contributions to private pension funds are permitted up to a maximum of 15 per cent 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 per cent 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 persons 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 is an illustrative guide, 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 ....

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