UAE: Guide on Accounting Standards and Interaction with Corporate Income Tax Issued

The UAE’s Federal Tax Authority has issued a guide on accounting standards and interaction with corporate income tax.

Ministerial Decision No. 114/2023 specifies that the only accounting standards accepted in the UAE for corporate income tax purposes are the International Financial Reporting Standards and the International Financial Reporting Standard for small and medium-sized entities.

The Guide states the cost method of accounting will be based on the definition of International Financial Reporting Standards, or an equivalent method of accounting under the accounting standards applied by the taxable person.

The Guide specifies the equity method of accounting will be based on the definition of International Financial Reporting Standards, or an equivalent method of accounting under the accounting standards applied by the taxable person.

More information related to accounting standards that govern how particular types of transactions and events should be reported in financial statements, will be released by the relevant standard setter or accounting standards board.

The taxable income of each taxable person will be determined separately on the basis of properly prepared, unconsolidated financial statements for financial reporting purposes in line with the accounting standards accepted in the UAE for corporate income tax purposes.

Taxable persons will use International Financial Reporting Standards as the accepted accounting standards in the UAE for corporate income tax purposes.

Taxable persons may only use the International Financial Reporting Standard for small and medium-sized entities if they derive revenue of less than 50 million AED in a tax period. If they do not meet this revenue requirement, they must use the International Financial Reporting Standard.

While Taxable persons must use International Financial Reporting Standards and the International Financial Reporting Standard for small and medium-sized entities to calculate taxable income for corporate income tax purposes or face penalties, they can opt to use other accounting standards for non-corporate income tax purposes.

An exempt person under the Corporate Income Tax Law may use other accounting standards. However, if an exempt person, specifically a government entity, a government controlled entity, an extractive business or a non-extractive natural resource business, has business or business activities treated as a separate taxable business, or businesses, under the Corporate Income Tax Law, the exempt person is required to use International Financial Reporting Standards or the International Financial Reporting Standard for small and medium-sized entities to prepare the financial statements for that taxable activity.

This would also be the case where an entity is not considered to be exempt anymore.

The accounting standards specify the amount of revenue and expenditure and the period in which they are recognised, for the purpose of calculating taxable income. They will then be specifically adjusted if required to calculate taxable income under the Corporate Income Tax Law.

A tax group has to prepare consolidated financial statements using International Financial Reporting Standards or the International Financial Reporting Standard for small and medium-sized entities for determining their taxable income.

This means they must prepare standalone financial statements on the basis of aggregation of the standalone financial statements of the parent company and each subsidiary that is a member of the tax group, as if the tax group were a single taxable person. The financial results, assets and liabilities of all members of the tax group must be consolidated, eliminating any transactions between the parent company and each subsidiary.

Transactions between certain members of the tax group should be determined in line with the arm’s length principle.

Taxable persons whose revenue exceeds 50 million AED during the relevant tax period and all qualifying free zone persons, irrespective of the level of revenue must prepare and maintain audited financial statements for the purposes of the Corporate Income Tax Law.

The 50 million AED threshold is not pro-rated if a tax period is longer or shorter than 12 months. The audit must be performed by a UAE-registered auditor, in line with Federal Law No. 12/2014 (as amended) and read with Ministerial Decision No. 403/2015.

If a tax group derives revenue exceeding 50 million AED on a consolidated basis during the relevant tax period, the consolidated financial statements of the tax group as the taxable person will be required to be audited. However, the Corporate Income Tax Law does not require separate financial statements of the parent company and subsidiary members to be audited, even when a member’s revenue exceeds 50 million AED.

In addition, private pension or social security funds that have made an application to and received approval from the Authority to be exempt from Corporate Income Tax must have an auditor. The auditor must, on an annual basis, confirm the compliance of the fund with the provisions of Ministerial Decision No. 115/2023.

The Guide also provides an overview of the preparation of financial statements, the cash basis of accounting, the realisation basis of accounting, other adjustments under Article 20(2)(i) of Federal Decree-Law No. 47/2022 (the Corporate Income Tax Law) and adjustments under the transitional rules.

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UAE: Corporate Tax Regulations for Free Zones Updated

Gulf News (United Arab Emirates), 3 November 2023: The UAE’s Finance Ministry has announced it has updated the corporate tax regulations for free zones.

The Ministry issued Cabinet Decision No. 100/2023 and Ministerial Decision No. 265/2023 to effect these changes.

Cabinet Decision No. 100/2023 expands the definition of Qualifying Income to include income from the ownership or exploitation of Qualifying Intellectual Property, following the methodology of the Organisation for Economic Co-operation and Developments modified nexus approach outlined in Ministerial Decision No. 265/2023.

Ministerial Decision No. 265/2023 lists the trading of Qualifying Commodities as a Qualifying Activity, allowing a 0% corporate tax rate for income generated from physical trading of various commodities on recognised stock exchanges. It also covers derivative trading income used for risk hedging in these trading activities.

In addition, it clarifies the scope of Qualifying and Excluded Activities. This provides free zone businesses with transparency.

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