1. Legislative Background
– The Federal Corporate Tax Law No. 47 of 2022 imposes a federal tax on the profits of companies and businesses in the UAE.
– The law came into effect on June 1, 2023. This guide complements the law by explaining how to determine taxable income.
2. Accepted Accounting Standards
– Taxable persons are required to prepare independent financial statements based on the accepted accounting standards in the UAE.
– Accepted standards include:
• International Financial Reporting Standards (IFRS).
• IFRS for Small and Medium-sized Entities (SMEs) if annual revenues do not exceed AED 50 million.
3. Permissible Accounting Methods
- Accrual Basis:
– The default method for recognizing income and expenses when earned/incurred, not when received/paid.
– Used to determine taxable income with greater accuracy.
B. Cash Basis:
– Permitted only if revenues do not exceed AED 3 million during the tax period.
– Recognizes transactions when cash is received or paid.
C. Realization Basis:
– Used to defer recognition of gains/losses until actual realization (e.g., sale of an asset, settlement of a liability).
– Better reflects cash availability for tax purposes.
4. Adjustments to Accounting Income for Corporate Tax
– The accounting income must be adjusted for the following:
• Exclude unrealized gains/losses.
• Disallow non-deductible expenses such as donations or penalties.
• Include amounts previously excluded when realized.
5. Financial Statement Preparation and Auditing
– Audited financial statements are required if revenues exceed AED 50 million or if operating in a Free Zone.
– Tax groups must prepare consolidated financial statements, treating all members as a single taxable entity.
6. Special Cases and Reliefs
– Accounting methods can change from cash to accrual or vice versa, subject to FTA approval and revenue thresholds.
– Small Business Relief is available if annual revenues do not exceed AED 3 million.
7. Transitional Provisions
– Transitional rules help mitigate the tax impact when transferring or disposing of qualifying intangible or financial assets or under business restructuring.
