Blog Blog

• August 01, 2023
• Dubai, United Arab Emirates

Tax Period:

UAE Implements New Corporate Tax Regime from June 2023, Allowing Flexibility for Taxable Entities

The United Arab Emirates (UAE) introduced its long-awaited Corporate Tax (CT) system from 01 June 2023, marking a significant milestone in the country's fiscal landscape. The CT will be levied annually, based on the Taxable Person's Tax Period, with each tax period typically spanning 12 months and ending on 31 December according to the Gregorian calendar.

Taxable entities, except those preparing financial statements under a different time frame, will automatically follow a January to December Tax Period. However, the UAE CT Law offers a strategic opportunity for Taxable Persons to align their Tax Period with their financial accounting period, streamlining compliance procedures and avoiding the need to maintain two separate sets of accounts for varying periods.

This alignment provision is especially beneficial for entities within multinational groups, whether they are incorporated in the UAE or elsewhere. By synchronizing the Tax Period with the group's financial year, companies can optimize their reporting processes and minimize administrative burdens.

Moreover, the Federal Tax Authority (FTA) has issued Decision No. 5 of 2023, allowing Taxable Persons to request changes to their tax period's start and end dates, or even opt for an entirely different tax period, under specific conditions. This flexibility caters to various scenarios, such as instances of liquidation, joining a tax group, or following an acquisition or merger, enabling entities to harmonize their Tax Period with that of their new parent company.

Example:

Fiscal Year End	First Tax Period
31st December 2023	01st January 2024 to 31st December 2024
31st May 2023	01st June 2023 to 31st May 2024
31st March 2023	01st April 2024 to 31st March 2025

Financial Statements:

Standardizing Financial Reporting in the UAE: IFRS Takes Center Stage

The financial landscape in the UAE is undergoing significant changes as authorities strive to enhance transparency and align reporting standards with international practices. All banks regulated by the Central Bank of the UAE, listed companies regulated by the Securities & Commodities Authority (SCA), and free zone businesses were required to prepare their financial statements in accordance with the International Financial Reporting Standards (IFRS).

For businesses established under "The UAE Commercial Enterprises Law," adherence to international accounting standards is mandatory, while others have the flexibility to choose between IFRS, UAE GAAP, or the accounting rules set by their specific regulator. However, in the interest of maintaining uniformity, many businesses prefer to follow IFRS.

The recent UAE Corporate Tax Law has added another layer of compliance. All corporates and businesses subject to corporate tax must now use IFRS to determine their taxable income. However, there's a provision for taxable entities with revenue not exceeding AED 50,000,000 to opt for 'IFRS for SMEs' in their financial reporting.

Financial statements covered by this mandate include the statement of income, statement of other comprehensive income (OCI), balance sheet, statement of changes in equity, and cash flow statements. Taxpayers are generally required to use the accrual basis of accounting, unless they qualify for the cash basis of accounting, which is available for specific categories of small businesses with revenue not exceeding AED 3,000,000, or under exceptional circumstances approved by the Federal Tax Authority.

For entities forming a Tax Group, the financial statements must be consolidated, aggregating the standalone financial statements of the parent company and each subsidiary while eliminating intra-group transactions. Additionally, each subsidiary company must follow the same financial year and accounting standards as the parent.

As businesses adapt to these changes, it's crucial to keep in mind that all documents and records supporting the information in the CT return, including financial statements, should be maintained for a minimum of seven years following the end of the relevant tax period. This measure aims to ensure proper compliance and accurate financial reporting in the UAE.

Audit:

UAE Mandates External Financial Audit for Businesses: New Rules Under Corporate Tax Regime

In the ever-evolving business landscape of the UAE, transparency and accountability have become paramount for companies operating within its borders. To uphold financial integrity and ensure compliance with various regulatory frameworks, a growing number of businesses are now required to undergo external audits of their financial statements.

According to Federal Law No. 32 of 2021, all companies operating in the mainland UAE are obligated to have their financial accounts thoroughly audited. This stringent requirement ensures that financial reporting remains accurate and reliable, fostering trust between stakeholders and the business community.

For free zone companies, the need for audited financial statements varies depending on the specific regulations of the free zone authority they fall under. Entities in prominent free zones such as Dubai Multi Commodities Centre (DMCC), Dubai World Central (DWC), Dubai Airport Free Zone (DAFZA), Jebel Ali Free Zone (JAFZA), Dubai Silicon Oasis (DSO), and Dubai International Financial Center (DIFC) may be required to submit audited financial statements to their respective authorities.

Foreign companies with a branch registered in the UAE must also comply with this audit mandate, necessitating the submission of annual audit reports for their UAE-based branches.

Even companies undergoing liquidation are not exempt from this scrutiny. Audited financial statements are essential for liquidators to prepare comprehensive audit reports, ensuring a smooth and transparent winding-up process.

Beyond these specific cases, numerous government authorities, ministerial departments, municipalities, insurance authorities, banks, non-banking financial institutions, suppliers, and owners often demand audited financial statements from businesses they engage with, reinforcing the significance of financial transparency across sectors.

With the recent implementation of the corporate tax (CT) regime in the UAE, even more businesses are expected to consider the necessity of conducting an annual external audit of their financial statements. The Ministry of Finance has taken a proactive step to streamline this process, issuing Decision No. 82 of 2023 under the UAE CT Law. According to this decision, taxable persons with revenues exceeding AED 50,000,000 during the relevant tax period must prepare and maintain audited financial statements. Additionally, qualifying free zone entities will be required to have their books audited to claim exemptions under certain conditions.

As the UAE continues to enhance its business environment and align with global best practices, the drive for greater financial transparency through external audits reflects the nation's commitment to fostering trust, reliability, and sustainable growth in its economy. Businesses across the UAE are encouraged to adhere to these requirements, which will undoubtedly contribute to a stronger and more resilient corporate landscape.