Welcome to the 15th instalment of our series offering comprehensive insights into UAE corporate tax. Maintaining accurate financial records is crucial for compliance with corporate tax laws. Taxable persons must prepare and keep financial statements to calculate their taxable income. These records support information in the corporate tax return and other filings with the authority. Even exempt persons must maintain records to prove their exempt status.
If you’re just joining us, we recommend starting from the beginning of our series to get a full grasp of the insights we’ve shared so far. You can find the first blog post here.
Record-Keeping Requirements
Retain records and documents for seven years following the end of the relevant tax period. This duration ensures that all necessary information is available for potential audits or reviews by the tax authorities.
Individual Financial Statements
Each UAE entity subject to corporate tax must prepare and maintain stand-alone financial statements. This requirement holds unless the entities have applied to form a tax group and made relevant adjustments.
Audited Financial Statements
Certain persons must prepare and maintain audited financial statements:
- Taxable persons with revenue exceeding AED 50 million during the relevant tax period.
- Qualifying free zone persons.
A registered auditor must audit these statements according to Federal Law No. 12 of 2014, Ministerial Resolution No. 403 of 2015, or other applicable legislation. It’s important to note that there is no obligation to prepare certified financial statements. Audited financial statements cannot be substituted with certified ones.
Ministerial Decision No. 82 of 2023 reiterates the obligation to prepare audited financial statements for corporate tax purposes. If a tax group’s revenue exceeds AED 50 million in a tax period, their financial statements must be audited. The Federal Tax Authority (FTA) may prescribe the form, manner, and timeline for submitting these statements.
Currency Conversion
For UAE corporate tax purposes, convert all amounts to UAE Dirhams. Translate income and expenses in foreign currencies based on the applicable exchange rate set by the Central Bank of the UAE. The FTA will provide the method for this conversion.
Documentation to Maintain
Taxable persons must maintain records and documents that support the information provided in a tax return or any other document submitted to the FTA. These records should enable the FTA to readily ascertain the taxable person’s taxable income. The FTA may request that a taxable person submits the financial statements used to determine their taxable income for a given tax period.
While the corporate tax law does not specify the exact records to maintain, it generally includes:
- Records of transactions in the tax period.
- Records of assets, including details of purchases or disposals.
- Records of liabilities.
- Records of stock held at the end of the tax period.
Specific Documents
Examples of specific documents to keep include:
- Bank statements.
- Loan or financing documentation.
- Sale and purchase ledgers.
- Invoices or other records of daily earnings.
- Order records and delivery notes.
- Other relevant business correspondence.
These documents do not need to be maintained in their original format. For instance, paper receipts can be scanned and stored electronically.
Penalties for Non-Compliance
Failure to keep the required records and other information as specified in the Tax Procedures Law and Corporate Tax Law can result in penalties:
- AED 10,000 for each violation.
- AED 20,000 for each repeated violation within 24 months of the last violation.
Exempt Persons
Exempt persons must maintain records that enable their exempt status to be readily ascertained by the FTA. The documentation required will depend on the reason for the exemption.
Record Retention Period
Both taxable and exempt persons must keep records and documents for seven years following the end of the tax period to which they relate. This requirement is based on the tax period to which the documents relate, not when they were created. For example, if a taxable person uses cash basis accounting, invoices or bills raised in one tax period but paid in another should be retained starting from the period they were paid.
Corporate Tax for Free Zone Businesses
Businesses with a UAE free zone license must understand their financial record-keeping obligations. Free zone businesses can qualify for 0% corporate tax if they meet specific conditions. New businesses should check whether their license falls under a ‘free zone’ or a ‘designated zone’ and ensure they meet the adequate substance requirements.
Free Zone Incentives
Since the UAE announced its corporate tax plans, it has been clear that free zone businesses are eligible for 0% tax, provided they meet certain conditions. The Federal Tax Authority has provided guidelines and best practices for free zone entities.
Accounting Requirements
Free zone entities must:
- Maintain all records and documents required for corporate tax purposes for seven years following the end of the tax period.
- Demonstrate how they calculated their qualifying income for 0% tax, even if separate financial statements are not required.
Maintaining diligent financial statements can help in clearly bifurcating revenue into qualifying, standard-rated, and exempt categories. This bifurcation makes it easier to determine whether the revenues represent non-qualifying or qualifying for corporate tax. Companies may need to adjust their accounting systems to support this bifurcation.
Compliance and Documentation
A free zone entity can claim 0% corporate tax if it fulfills the required conditions. The qualifying income for 0% extends to 13 activities. Non-qualifying income or excluded activity income will be taxed at the standard rate of 9%. Income from dividends may be exempt if certain conditions are met.
Importance of Compliance
Non-compliance can lead to a 9% tax rate, not only for a particular tax period but for four successive tax periods. Businesses in free zones must understand the impact of non-compliance. New businesses should consult the latest FTA guidelines to maximize tax benefits and ensure accurate financial planning.
General Anti-Abuse Rule
The general anti-abuse rule prevents ‘abusive’ transactions or arrangements that, while legal, do not align with the law’s intended spirit and purpose. This rule allows the FTA to counteract or adjust corporate tax advantages obtained through such transactions. The test is whether, considering all relevant circumstances, it can reasonably be concluded that the transactions were entered without a valid commercial reason and mainly aimed at obtaining a corporate tax advantage inconsistent with the law’s intention.
Maintaining comprehensive financial records is essential for corporate tax compliance. Taxable persons must prepare and keep detailed financial statements and supporting documents. These records not only support tax return filings but also protect against potential penalties. Understanding the requirements and ensuring compliance with the corporate tax laws will help businesses operate smoothly and avoid unnecessary fines. Free zone businesses should pay particular attention to their specific requirements to benefit from the 0% corporate tax rate.
To stay updated with Corporate Tax Law and related implementing decisions you can visit this link.
