As the effective date of the UAE corporate tax, 1 June 2023, draws closer, the Cabinet, Ministry of Finance, and Federal Tax Authority have issued a series of decisions aimed at providing clarity on application of the provisions of the Corporate Tax Law (“CT Law”). One such decision, issued by the Ministry of Finance on 10 April 2023 (No. 82), pertains specifically to the categories of taxpayers who are required to prepare and maintain audited financial statements for corporate tax purposes.
Under the CT Law, the Federal Tax Authority may request taxpayers to submit their financial statements, which are used to calculate taxable income, alongside the corporate tax return or separately upon request. Taxpayers are generally expected to prepare and maintain financial statements. The recent Decision (No. 82) specifies that the financial statement of a taxpayer with revenue exceeding AED 50 million (approx. US$ 13.6 million) during the tax period (usually the financial year) and that availing a zero-rate free zone regime (i.e., Qualifying Free Zone Persons) must be audited by external auditors.
If a taxpayer is a tax group comprising two or more UAE tax resident companies, then the parent company will have to consolidate the financial statements of each subsidiary company and eliminate transactions between companies within the group. The financial statements of each subsidiary company must have the same financial year and accounting standards.
The financial statements of taxpayers should comply with the accounting standards that are accepted in the UAE, with the most commonly used being the International Financial Reporting Standards (IFRS). Taxpayers are expected to prepare the financial statements for a 12-month period (e.g. from 1 January to 31 December) which is a usual tax period unless a shorter or longer tax period needs to be used depending on the specific circumstances.
Taxpayers should prepare their financial statements and determine their taxable income using the accrual basis of accounting, unless they qualify to use the cash basis of accounting, which may be available for specific categories of individual entrepreneurs and small businesses.
It is also worth noting that as per requirements of CT Law, all documents and records supporting the information in the CT return which include the financial statements should be maintained for at least seven years following the end of the relevant tax period.
Until now, the audit of financial statements was only required in certain free zones and the number of free-zone authorities that issue trade licenses are increasingly making the annual external audit a standard requirement. The implementation of corporate tax in the UAE means that more companies may need to consider conducting an annual external audit of their financial statements.
Companies should also consider preparing and maintaining the audited financial statements for the financial year before corporate tax comes into effect as this will help them to have a formal review of their opening balance sheet for corporate tax purposes.
Our team of experienced accountants and tax professionals can provide valuable assistance to taxpayers in the preparation of their financial statements and determine their taxable income in compliance with provisions of corporate tax legislation.