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Adherence To Accounting Principles
Pursuant to Ministerial Decision No. 114 of 2023, each Taxable Person’s Taxable Income is to be determined independently, utilizing duly prepared, individual (unconsolidated) Financial Statements that adhere to the Accounting Standards recognized in the UAE for Corporate Tax purposes.
Exemptions and Special Provisions
Exempt persons under the Corporate Tax Law, such as government entities and extractive businesses, are not subject to the mandatory use of IFRS or IFRS for SMEs for their overall financial reporting. However, if any business or business activity of an exempt person falls under the category of a separate taxable business, IFRS or IFRS for SMEs must be used to prepare the financial statements for that taxable activity.
IFRS and IFRS for SMEs: The Pillars of Corporate Tax Reporting
The Corporate Tax Law mandates the use of either International Financial Reporting Standards (IFRS) or International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) for the preparation of financial statements for corporate tax purposes. The choice between these two standards depends on the revenue of the taxable entity.
For Corporate Tax purposes in the United Arab Emirates, entities can utilize the CBA under specific eligibility criteria:
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IFS: IFRS, the more comprehensive and stringent standard, is mandatory for taxable entities with revenue exceeding AED 50 million in a tax period. It provides a globally recognized framework for preparing financial statements, ensuring comparability and reliability across jurisdictions.
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IFRS for SMEs: IFRS for SMEs, a simplified and less costly alternative, is designed for smaller entities with revenue not exceeding AED 50 million in a tax period. It offers a streamlined set of accounting standards tailored to the specific needs of SMEs while maintaining a high level of financial reporting quality.
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Audit Requirement For Financial Statements
In accordance with the UAE’s corporate tax regime, taxable entities with revenue surpassing AED 50 million during the relevant tax period and all qualifying free zone entities, regardless of their revenue level, are mandated to prepare and maintain audited financial statements for
corporate tax purposes.
Accounting Methods: Accrual and Cash Basis
Two primary accounting methods are recognized for corporate tax purposes in the UAE:
1. Accrual Basis of Accounting: The primary accounting method used for corporate tax purposes in the UAE. Under this method, revenue and expenditure recognition aligns with the time they are earned or incurred, irrespective of the timing of cash payments or invoice issuance. This approach provides a more accurate representation of the financial performance of a business over time.
2. Cash Basis of Accounting: Entities may be eligible to use the Cash Basis of Accounting under exceptional circumstances. This simplified accounting method recognizes revenue and expenses solely when cash is received or disbursed. The Cash Basis of Accounting is generally suitable for small businesses with straightforward financial transactions.
Eligibility for Cash Basis of Accounting
For Corporate Tax purposes in the United Arab Emirates, entities can utilize the CBA under specific eligibility criteria:
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Revenue Threshold: Entities with an annual revenue of AED 3 million or less can prepare financial statements using the CBA for Corporate Tax purposes. This threshold applies to the total revenue generated from all business activities conducted by the entity.
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Exceptional Circumstances: Entities exceeding the AED 3 million revenue threshold may still be eligible to use the CBA under exceptional circumstances. These circumstances are not explicitly defined in the Corporate Tax Law, but they may include situations where the use of the accrual basis would cause undue hardship or administrative burdens for the entity.
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