Federal Decree-Law No. 47

Ministerial Decision No.134 of 2023 on the General Rules for Determining Taxable Income for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses

Introduction

In the realm of taxation for corporations and businesses, the Minister of State for Financial Affairs has made significant strides by introducing Ministerial Decision No.134 of 2023. This decision plays a pivotal role in establishing the general rules for determining taxable income, ensuring fair and transparent practices for all entities involved. By amending certain regulations and considering the broader context, this decision aims to streamline tax procedures and promote compliance. Let us delve into the key provisions of this decision and understand its impact on the corporate taxation landscape.

Definitions

To begin our exploration, it is crucial to familiarize ourselves with the definitions outlined in Ministerial Decision No.134 of 2023. These definitions provide clarity and ensure consistent interpretation of the terms used within the context of the decision. Here are some of the key definitions:

1. Accounting Standards: The specific accounting standards designated by the Minister to be applied for the purposes of the Corporate Tax Law.
2. Financial Statements: A comprehensive set of statements, including but not limited to the statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity, and cash flow statement. These statements adhere to the Accounting Standards adopted by the Taxable Person.
3. Accrual Basis of Accounting: An accounting method wherein income is recognized when earned, and expenditure is recognized when incurred.
4. Financial Asset: A financial asset as defined by the Accounting Standards applied by the Taxable Person.
5. Financial Liability: A financial liability as defined by the Accounting Standards applied by the Taxable Person.
6. Equity Method of Accounting: The equity method of accounting, as defined by the International Financial Reporting Standards (IFRS) or an equivalent method of accounting as per the Accounting Standards applied by the Taxable Person.
7. Cost Method of Accounting: The cost method of accounting, as defined by the International Financial Reporting Standards (IFRS) or an equivalent method of accounting as per the Accounting Standards applied by the Taxable Person.

Adjustments to the Accounting Income

Ministerial Decision No.134 of 2023 introduces various adjustments to the accounting income for the determination of taxable income. These adjustments serve to ensure a fair and accurate representation of the financial position of the entities. Let’s examine some of these adjustments in detail:

Other Adjustments to the Accounting Income for Determining the Taxable Income

For the purpose of calculating the taxable income, the accounting income is adjusted as follows:

1. Realized and Unrealized Gains and Losses: The Financial Statements report realized or unrealized gains and losses. However, for calculating the taxable income, only gains and losses that are subsequently recognized in the statement of income are considered.
2. Equity Method of Accounting: If the Equity Method of Accounting is applied, the effects of this method are replaced with the effects of the Cost Method of Accounting, as allowed by the Accounting Standards.
3. Gains and Losses on a Realization Basis: When a Taxable Person chooses to consider gains and losses on a realization basis, certain adjustments are made for assets and liabilities. These adjustments include excluding depreciation, amortization, or other changes in the value of the asset (except for Financial Assets) beyond the original cost. Additionally, any change in the value of a liability or a Financial Asset is excluded, except when calculating the gain or loss upon realization. Moreover, any unrecognized amount related to Corporate Tax purposes is included upon realization, subject to specific conditions.
4. Transfers Within a Qualifying Group: In cases where there is a transfer of assets or liabilities between Taxable Persons belonging to the same Qualifying Group, adjustments are made to exclude any depreciation, amortization, or other changes in the value of the asset or liability. These adjustments are made to the extent that they relate to a gain or loss not recognized under specific provisions of the Corporate Tax Law.

Other Adjustments to the Accounting Income in Relation to Transactions with Related Parties

In transactions involving the transfer of assets or liabilities between Related Parties, certain adjustments are made to calculate the Taxable Income. The transferee undertakes the following adjustments:

Consideration Exceeding Market Value: If the consideration paid by the transferee exceeds the Market Value, adjustments are made to exclude depreciation, amortization, or other changes in the value of the asset or liability. These adjustments relate to the change in value between the net book value recognized by the transferee and the Market Value. Upon realization, any excess amount above the Market Value is included in the calculation of gain or loss.

Consideration Lower Than Market Value: When the consideration paid by the transferee is lower than the Market Value, and the transferor has included the difference in its Taxable Income, adjustments are made to exclude changes in the value of the asset or liability. These adjustments relate to the difference between the Market Value and the net book value recognized by the transferee. Upon realization, the gain is reduced by the difference between the Market Value and the net book value at the time of transfer, excluding any net amount not included in the Taxable Income.

These adjustments ensure a fair assessment of transactions with Related Parties and promote transparency in tax reporting.

Conclusion

Ministerial Decision No.134 of 2023 on the General Rules for Determining Taxable Income plays a vital role in shaping the landscape of corporate taxation. By providing clear definitions and introducing necessary adjustments, the decision promotes transparency, accuracy, and fairness in tax calculations. Adhering to the guidelines outlined in this decision ensures that businesses comply with the tax regulations while accurately determining their taxable income.