Updated: August 2026
UAE Corporate Tax applies to Tax Periods commencing on or after 1 June 2023. One of the most important aspects of Corporate Tax compliance is understanding that the accounting profit reported in the Financial Statements is the starting point for determining Taxable Income, but it is not necessarily the final amount subject to Corporate Tax. The UAE Corporate Tax framework requires certain adjustments to Accounting Income before Taxable Income is determined.
1. Basis of Calculating Taxable Income
The starting point for calculating Taxable Income is the Accounting Income — the accounting net profit or loss for the relevant Tax Period as reported in the Financial Statements.
From this Accounting Income, the business considers the adjustments required under the Corporate Tax Law. Depending on the circumstances, these may include adjustments relating to:
- Exempt Income
- Deductible and non-deductible expenditure
- Unrealised gains and losses
- Interest deduction limitations
- Related Party and Connected Person transactions
- Available Tax Loss Relief
After the applicable adjustments have been made, the resulting amount represents the Taxable Income of the business.
For a Taxable Person subject to the standard UAE Corporate Tax rates, 0% applies to Taxable Income up to AED 375,000 and 9% applies to Taxable Income exceeding AED 375,000.
2. Deductible and Non-Deductible Expenditure
An expense recorded in the Financial Statements is not automatically deductible for Corporate Tax purposes.
Generally, expenditure must be incurred wholly and exclusively for the purposes of the Business to be deductible, subject to the specific provisions and limitations of the Corporate Tax Law.
Certain expenditure may therefore need to be added back when determining Taxable Income.
Entertainment Expenditure
Only 50% of qualifying entertainment expenditure incurred in connection with customers, shareholders, suppliers and other business partners is generally deductible.
This can include expenditure relating to meals, accommodation, transportation, admission and other entertainment provided in connection with the business. The remaining 50% is non-deductible and therefore requires adjustment in determining Taxable Income.
Non-Deductible Expenditure
Examples of expenditure that may be wholly non-deductible include:
- Fines and penalties, subject to the applicable exceptions;
- Bribes and other illicit payments;
- Dividends and other profit distributions;
- Certain donations, grants and gifts;
- Expenditure incurred in deriving Exempt Income;
- Recoverable input VAT; and
- Expenditure that is not incurred for the purposes of the Business.
The FTA's Determination of Taxable Income Guide specifically addresses deductible and non-deductible expenditure, including entertainment expenditure, donations, fines, payments to Connected Persons and input VAT.
3. Interest Expenditure
Interest expenditure also needs to be reviewed when determining Taxable Income because the accounting interest expense may not always be fully deductible for Corporate Tax purposes.
The General Interest Deduction Limitation Rule can restrict the amount of Net Interest Expenditure deductible in a Tax Period. The calculation considers the applicable limitation based on 30% of adjusted EBITDA, together with the threshold and other conditions prescribed under the Corporate Tax rules.
In addition to the general limitation, the Specific Interest Deduction Limitation Rule should be considered for certain financing arrangements involving Related Parties.
Accordingly, any interest expenditure disallowed under the applicable rules must be adjusted when determining Taxable Income.
4. Exempt Income
Certain income recognised in the Financial Statements may qualify as Exempt Income under the Corporate Tax Law and therefore needs to be excluded when determining Taxable Income.
Depending on the applicable conditions, Exempt Income can include:
- Dividends and other profit distributions received from a UAE Resident juridical person;
- Income and gains qualifying for the Participation Exemption; and
- Income of a Foreign Permanent Establishment, where the relevant election has been made and the prescribed conditions are satisfied.
The treatment of Exempt Income is important because the related expenditure must also be considered. Expenditure incurred in deriving Exempt Income may not be deductible for Corporate Tax purposes.
5. Unrealised Gains and Losses
Accounting Income may include gains or losses arising from changes in the value of assets or liabilities even though those gains or losses have not yet been realised.
Under the Corporate Tax regime, a Taxable Person using the Accrual Basis of Accounting may, subject to the applicable requirements, elect to recognise certain gains and losses on a realisation basis.
Depending on the election made, adjustments may therefore be required to remove relevant unrealised gains or losses from Accounting Income until they are realised.
The FTA's Determination of Taxable Income Guide specifically covers both unrealised gains and losses and the election to use the realisation basis as part of the determination of Taxable Income.
6. Related Party and Connected Person Adjustments
Transactions between Related Parties are required to comply with the arm's length principle.
This means that the terms and pricing of controlled transactions should be consistent with those that would have been agreed between independent parties under comparable circumstances.
Where the accounting treatment of a Related Party transaction does not reflect an arm's length result, a Transfer Pricing adjustment may be required in determining Taxable Income.
Payments or benefits provided to Connected Persons must also be reviewed under the applicable Corporate Tax provisions.
Accordingly, intercompany charges, management fees, financing arrangements and other Related Party or Connected Person transactions should not simply be accepted at their accounting value without considering the Corporate Tax requirements.
7. Tax Loss Relief
Once the relevant adjustments have been made, a business may be able to utilise eligible Tax Losses carried forward from previous Tax Periods.
Generally, Tax Loss Relief that can be used in a Tax Period is restricted to 75% of the Taxable Income of that Tax Period before applying the Tax Loss Relief, subject to the conditions prescribed under the Corporate Tax Law. The original article also identified this 75% limitation.
Any remaining eligible Tax Loss may generally be carried forward for use in subsequent Tax Periods, subject to the applicable conditions.
8. Arriving at Taxable Income
The calculation can therefore be understood as a movement from the accounting result to the tax result:
Start with Accounting Income
Then consider the applicable adjustments for:
- Exempt Income
- Non-deductible or restricted expenditure
- Interest deduction limitations
- Unrealised gains and losses
- Related Party and Connected Person transactions
- Available Tax Loss Relief
- Other adjustments required under the Corporate Tax Law
The resulting amount is the business's Taxable Income.
This distinction between Accounting Income and Taxable Income is fundamental. A business should therefore not simply take its accounting net profit and apply the Corporate Tax rate. The Financial Statements provide the starting point; the Corporate Tax rules determine the adjustments required to arrive at the final Taxable Income.
Conclusion
Calculating UAE Corporate Tax begins with the Financial Statements, but determining the correct Taxable Income requires an understanding of how the Corporate Tax Law treats different components of income and expenditure.
Businesses should therefore review their Accounting Income, exempt income, deductible and non-deductible expenditure, interest costs, unrealised gains and losses, Related Party transactions and available Tax Losses before finalising their Corporate Tax position.
The key question is not simply:
“What is the accounting profit?”
It is:
“What adjustments are required to convert Accounting Income into Taxable Income?”
That reconciliation is at the heart of calculating Taxable Income under the UAE Corporate Tax regime. The FTA's dedicated Determination of Taxable Income Guide is specifically intended to explain these adjustments and the calculation of Corporate Tax Payable.
Disclaimer
This article is for general informational and educational purposes only and does not constitute tax, legal, accounting or professional advice. The determination of Taxable Income depends on the facts and circumstances of each Taxable Person. Readers should refer to the UAE Corporate Tax Law, applicable Ministerial and Cabinet Decisions and Federal Tax Authority guidance, and obtain professional advice where appropriate.
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