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Understanding UAE Corporate Tax: Your Guide to Accounting Standards, small Business relief, and more
April 30, 2024
Companies are not required to keep separate books of account for tax purposes under the UAE corporate tax, compared to many other countries.
According to the UAE’s recognized accounting standards, the right financial statements would be used to calculate the taxable income for a given tax period. To prepare the financial accounts, comply to certain accounting standards:
1. International Financial Reporting Standards (IFRS); or
2. IFRS for SMEs if the revenue is up to Dh50 million.
The Federal Tax Authority (FTA) has released a guide on the interaction of these accounting standards with corporate tax. Failure to comply with the specified standards can result in administrative penalties.
Accounting Basis: Cash vs. Accrual
Under the cash basis, income and expenditure can be recorded based on when payments are received or made, regardless of when invoices are exchanged or supplies are completed. This option offers small enterprises administrative convenience, as they can use their bank statements or cash ledger instead of maintaining detailed books of account.
Small Business Relief
Under the UAE’s Small Business Relief, a taxpayer may have no tax obligations for any tax year up to December 31, 2026, regardless of their actual revenue or profits. This is one of the special tax breaks that are dependent on a taxpayer’s yearly income. For any of these years, the annual revenue cannot be more than Dh3 million.
Whatever the accounting technique, a taxpayer may choose to apply for Small Business Relief on IFRS, IFRS for SMEs, or cash basis of accounting. It gives taxpayers the freedom to maximize their tax benefits.
Transactions with related parties
Typically, all taxable individuals are required to prepare financial statements using the accrual basis of accounting. However, there is an alternative to use the cash basis if total receipts during the tax period do not exceed Dh3 million. Additionally, the cash basis can be utilized in ‘exceptional circumstances’ with approval from the FTA.
With the cash basis, income and expenditure are recorded based on when payments are received or made, irrespective of when invoices are exchanged or supplies are completed. This option provides small enterprises with administrative convenience, as they can utilize their bank statements or cash ledger instead of maintaining detailed books of account.
Realized vs unrealized gains/losses.
Realized and unrealized gains or losses are another common conflict between tax and financial accounting. Realized gains are those that are obtained upon the conclusion of a transaction, like profits from the sale of real estate.
Gains that have not yet been realized but were recorded in the books of account using “fair value accounting” at the current market value are known as unrealized gains. Short-term financial instruments that have not yet been sold but have been revalued at market value as of the balance-sheet date serve as an example.
A taxpayer may choose to lower the unrealized profits or loss when determining their taxable income, according to the guidelines. This is an irreversible decision that must be taken at the time of filing the initial tax return.
It is accurate to say in the FTA guide that accounting income serves as the basis for determining taxable income. Correctly computed accounting income allows for the comprehensive preparation of the consequent taxable income computation.
Companies should concentrate on both the essential reconciliation between accounting income and taxable income as well as keeping thorough records of the accounting income.
