The tax decrees of the different Emirates establish that taxable income is calculated on the basis of financial accounting profit, with the application of specific tax adjustments.

According to the Corporation Tax Act, the net accounting profit (or loss) shown in a company's independent financial statements is used as a starting point for determining its taxable income. The legislation prescribes a series of key adjustments to the net accounting profit (or loss) to calculate the final tax base.

The following are the relevant aspects to consider in determining the nature of a taxable person and the applicable tax base:

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Capital Gains

In the legislation of the United Arab Emirates (UAE), there are no specific provisions for this taxation. Instead, any gain or loss derived from the disposal of capital assets is considered part of general taxable income.

Unrealized Gains or Losses

In accordance with the TC Act, a taxable person who draws up their financial statements following the accrual accounting principle can choose the following alternatives:

1. Recognize profits and losses on the basis of performance for the purposes of the TC Act: In this case, all unrealized gains would not be subject to taxation until they are actually realized. Similarly, all unrealized losses would not be deductible until realized.

2. Recognize profits and losses on the basis of realization for the purposes of the VAT Act only for assets and liabilities held in a capital account: Under this option, only unrealized gains and losses related to assets and liabilities held in the capital account would not be taxable or deductible, respectively, until they are realized. In contrast, unrealized gains and losses derived from assets and liabilities held on income account would continue to be included in current taxable income.

Exempt income

To avoid cases of double taxation and recognizing the position of the United Arab Emirates (UAE) as an international business center and leading location for holding companies, the Corporate Tax regime exempts dividends and other distributions of benefits received by a taxable person from a resident tax entity in the UAE (i.e., local dividends) or received from individuals who are not tax residents in the UAE, as well as other types of income that are detailed below.

Participation Exemption

Dividends and other profit distributions related to the ownership (referred to as “participation”) of a foreign legal entity will be exempt from taxes if the following conditions are met:

1. The participation is at least 5%.
2. There is an uninterrupted holding period of 12 months (or the intention to keep it for 12 months).
3. Participation is subject to taxation in your country or territory of residence at a rate of not less than 9%.
4. No more than 50% of the assets directly or indirectly owned by the shareholding consist of an ownership interest or rights that could not benefit from the exemption from participation if these assets were directly in the hands of the taxable person.

The “taxable person” test would be fulfilled if:

• An effective tax rate of 9% applies to the income or benefits of participation.
• In the event that such 9% ETR does not apply depending on the tax regime of the relevant jurisdiction, an ETR of 9% is reached if recalculated based on the provisions of the UAE TC Act.

A share of less than 5% could also benefit from the exemption when the acquisition cost of the share exceeds AED 4 million.

Foreign Permanent Establishment Exemption

A resident may create a permanent establishment in another jurisdiction in accordance with the national tax laws of that jurisdiction, subject to any agreement

applicable tax. Generally, income attributed to such foreign permanent establishment will be taxed in that jurisdiction. In this case, the UAE Corporate Tax Act offers a resident the possibility to opt for exemption from this income in the UAE. The exemption will be available if the foreign permanent establishment is subject to personal income tax or similar taxes at a rate of no less than 9% in the foreign jurisdiction. If the resident opts for this exemption, they will not be able to take into account foreign losses, revenues, expenses and tax credits in connection with the foreign permanent establishment in the UAE.

International Transportation Exemption

Income earned by a non-resident from operating aircraft or ships in international transport will not be subject to income tax in the UAE if the income earned by a person resident in the UAE carrying out these activities is exempt from income tax in the non-resident's jurisdiction.

Partners of an Unincorporated Company

As a general rule, a company not incorporated into a company will not be treated as a taxable person. In this context, the company is considered as such and each partner is treated as a taxable person in their distributive part. This implies that each partner is responsible for complying with UAE administration and compliance burdens, as well as for paying Corporate Tax on their taxable income, as if each were carrying out independent subject businesses. The assets, liabilities, income and expenses of the company must be allocated to each partner according to their distributive part.

The partners of an unincorporated company can submit an irrevocable request (except for exceptional circumstances) to the Federal Tax Authority (FTA) for the unincorporated company to be treated as a taxable person. This means that the company would be recognized as its own entity subject to UAE Corporation Tax. If this request is submitted, the partners will continue to be jointly and severally liable for the company's tax liability.

In addition, one of the partners will be designated as responsible for all obligations and procedures related to UAE Corporate Tax.

Foreign Companies

Companies owned by foreign individuals will be treated as companies without legal personality when the company is not subject to taxation under the legislation of foreign jurisdiction and each partner is individually subject to taxation for their distributive part of the company's income when it receives or accrues them.

Partnerships are flexible vehicles that are often complex from a tax point of view. The approach adopted in the United Arab Emirates Corporation Tax Act attempts to simplify tax treatment and is in line with international best practices.

Family Foundations

The United Arab Emirates Corporation Tax Act recognizes family foundations, trusts and other similar entities as independent legal entities, used to protect and manage the assets of an individual or family with their own legal personality.

A family foundation can choose to be treated as a transparent “corporation without legal personality” for the purposes of the UAE TC, provided that certain conditions are met. This option would generally prevent the income of the foundation or trust from being subject to corporate tax in the UAE, thus constituting a useful vehicle for families to ensure a fiscally efficient structure, adequate governance and effective estate planning.