How are provisions and accruals treated for Corporate Tax?
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Provisions and accruals follow your accounting treatment for Corporate Tax: if a provision relates to an expense that would otherwise be deductible, both creating it and later releasing it are taken into account as expense/income in the relevant year. A provision for something non-deductible (like fines) is never allowed, even if booked.
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The detail
Taxable Income starts from Accounting Income, so movements in provisions carried under IFRS/IFRS for SMEs are taken into account as they are recognised. A provision is deductible only to the extent it relates to an expense that would itself be deductible under the Corporate Tax Law; where the underlying expense is non-deductible (e.g. fines and penalties), the provision must be added back regardless of accounting treatment. On reversal or release of a deductible provision, the resulting credit is taxable income with no special adjustment needed.12
What the law says
- Taxable Income for a Tax Period is the Accounting Income for that period, adjusted only for the specific items listed in Article 20(2), such as exempt income, reliefs and deductions.1
- FTA guidance states that movements in a provision are taken into account in determining Taxable Income and are deductible only if they relate to an expense that would be deductible under the Corporate Tax Law.2 Based on FTA guidance
- Where a provision is for an expense that is disallowable (e.g. fines and penalties), it is not deductible and must be added back when calculating Taxable Income.2 Based on FTA guidance
What it depends on
- The deductibility of a provision depends entirely on whether the underlying expense it provides for would itself be deductible.2 Based on FTA guidance
- Release or reversal of a previously deductible provision is treated as taxable income in the period of reversal, with no further adjustment required.2 Based on FTA guidance
Check before you rely on it
- Confirm whether the provision relates to a deductible or non-deductible type of expense (e.g. bad debts vs fines).
- Check whether any provision has been reversed in the current period and included as income.
- Verify the provision is calculated under IFRS or IFRS for SMEs as applicable to your entity.
Sources (2) — read the official text
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Article 20 – General Rules for Determining Taxable Income
Read the article
Article 20 – General Rules for Determining Taxable Income 1. The Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the State. 2. The Taxable Income for a Tax Period shall be the Accounting Income for that period, and to the extent applicable, adjusted for the following: a. Any unrealised gain or loss under Clause 3 of this Article. b. Exempt Income as specified in Chapter Seven of this Decree-Law. c. Reliefs as specified in Chapter Eight of this Decree-Law. d. Deductions as specified in Chapter Nine of this Decree-Law. e. Transactions with Related Parties and Connected Persons as specified in Chapter Ten of this Decree-Law. f. Tax Loss relief as specified in Chapter Eleven of this Decree-Law. g. Any incentives or special reliefs for a Qualifying Business Activity as specified Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 26 in a decision issued by the Cabinet at the suggestion of the Minister. h. Any income or expenditure that has not otherwise been taken into account in determining the Taxable Income under the provisions of this Decree-Law as may be specified in a decision issued by the Cabinet at the suggestion of the Minister. i. Any other adjustments as may be specified by the Minister. 3. For the purposes of calculating the Taxable Income for the relevant Tax Period, and subject to any conditions that the Minister may prescribe, a Taxable Person that prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis in relation to: a. all assets and liabilities that are subject to fair value or impairment accounting under the applicable accounting standards; or b. all assets and liabilities held on capital account at the end of a Tax Period, whilst taking into account any unrealised gain or loss that arises in connection with assets and liabilities held on revenue account at the end of that period. 4. For the purposes of paragraph (b) of Clause 3 of this Article: a. “Assets held on capital account” refers to assets that the Person does not trade, assets that are eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets. b. “Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this DecreeLaw, or liabilities treated under applicable accounting standards as noncurrent liabilities. c. “Assets and liabilities held on revenue account” refers to assets and liabilities other than those held on a capital account. d. An “unrealised gain or loss” includes an unrealised foreign exchange gain or loss. 5. Notwithstanding Clauses 1 and 3 of this Article, the Minister may prescribe any of the following for the purposes of this Decree-Law: a. The circumstances and conditions under which a Person may prepare financial statements using the cash basis of accounting. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 27 b. Any adjustments to the accounting standards to be applied for the purposes of determining the Taxable Income for a Tax Period. c. A different basis for determining the Taxable Income of a Qualifying Business Activity. 6. Subject to any conditions prescribed under Clause 5 of this Article, a Taxable Person can make an application to the Authority to change its method of accounting from cash basis to accrual basis from the commencement of the Tax Period in which the application is made or from the commencement of a future Tax Period. 7. In the case of any conflict between the provisions of this Decree-Law and the applicable accounting standards, the provisions of this Decree-Law shall prevail to that extent.
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Read the article
5.3.12 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. 5.3.13 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. 133 Article 28(1) of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 60
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Written by AI from the FTA sources above and checked before display. Not tax advice or official FTA information - confirm with a tax adviser before you act. Full disclaimer
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