Corporate tax is levied on the taxable income earned by a taxable person in a tax period. Corporate tax will generally be levied on an annual basis, and the corporate tax liability will be calculated by the taxable person on a self-assessment basis. This means that the corporate tax will be calculated and paid through a tax return submitted by the taxable person to the Federal Tax Authority.
The starting point for calculating taxable income is the accounting income (i.e. net profit or loss before tax) of the taxable person according to their financial statements. The taxable person will then need to make certain adjustments to determine their taxable income for the relevant tax period. For example, adjustments may need to be made to accounting income for income that is exempt from corporate tax or for expenses that are not fully or partially deductible for corporate tax purposes.
What Is Exempt Income?
The corporate tax law exempts certain types of income from corporate tax. This means that taxable persons will not be subject to corporate tax on this income and cannot claim a deduction for any related expenses. Taxable persons who earn exempt income remain subject to corporate tax only on their taxable income. The main purpose of exempting certain income from corporate tax is to prevent double taxation of certain types of income. Specifically, dividends or capital gains realized from domestic and foreign stocks will generally be exempt from corporate tax. Furthermore, a resident person can choose, subject to certain conditions, not to account for the income of his foreign permanent establishment for corporate tax purposes in the country.
What Are Deductible Expenses?
In principle, all legitimate business expenses incurred entirely and exclusively for the purposes of generating taxable income are deductible, although the timing of the deduction may vary depending on the types of expenses and accounting methods applied. For capital assets, expenses are generally incurred by deducting depreciation or amortization over the economic life of the asset or utility.
Expenses that have a dual purpose, such as expenses incurred for both personal and business purposes, should be apportioned in proportion to the relevant part of the expenditure that would be treated as deductible if it was incurred entirely and exclusively for the business purposes of the taxable person. Some expenses that are deductible under general accounting rules may not be fully deductible for corporate tax purposes, and those expenses will need to be added back to accounting income for purposes of determining taxable income.
