UAE Corporate Tax: IFRS and Accounting Compliance

Adherence To Accounting Principles
Pursuant to Ministerial Decision No. 114 of 2023, taxable persons must independently determine their taxable income. They are required to use duly prepared, individual (unconsolidated) financial statements that adhere to UAE Corporate Tax: IFRS and Accounting Compliance standards recognized for corporate tax purposes.

Exemptions and Special Provisions
Exempt persons under the Corporate Tax Law, such as government entities and extractive businesses, do not need to use IFRS or IFRS for SMEs for their overall financial reporting. However, should any business or business activity of an exempt person fall under the category of a separate taxable business, IFRS or IFRS for SMEs must be used to prepare financial statements for that taxable activity.

IFRS and IFRS for SMEs: The Pillars of Corporate Tax Reporting
The Corporate Tax Law mandates that entities use either International Financial Reporting Standards (IFRS) or International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) for corporate tax purposes. Which standard to apply depends on the entity’s revenue.

IFRS Requirements
For Corporate Tax purposes in the United Arab Emirates, entities with revenue exceeding AED 50 million in a tax period must use IFRS. This globally recognized framework ensures comparability and reliability in preparing financial statements across jurisdictions.

IFRS for SMEs
IFRS for SMEs is a simplified and less costly alternative. It is specifically designed for smaller entities with revenue not exceeding AED 50 million in a tax period, offering a streamlined set of accounting standards tailored to SMEs’ needs while maintaining high financial reporting standards.

Audit Requirement For Financial Statements
Under the UAE’s corporate tax regime, taxable entities with revenue exceeding AED 50 million in the relevant tax period must prepare and maintain audited financial statements. Additionally, all qualifying free zone entities, regardless of their revenue level, must do the same for corporate tax purposes.

Accounting Methods: Accrual and Cash Basis
Two primary accounting methods are recognized for corporate tax purposes in the UAE:

Accrual Basis of Accounting
The Accrual Basis of Accounting is the primary accounting method used for corporate tax purposes in the UAE. Under this method, businesses recognize revenue and expenses when 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.

Cash Basis of Accounting
Entities may be eligible to use the Cash Basis of Accounting under exceptional circumstances. This simplified 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 UAE, entities can use the Cash Basis of Accounting (CBA) under specific eligibility criteria:

• 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.

• 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 using the accrual basis would cause undue hardship or administrative burdens.

Conclusion
The UAE’s corporate tax regime establishes a robust framework for accounting and reporting. It ensures taxable entities adhere to internationally recognized standards and maintain transparency in their financial disclosures. Considerations such as the choice between IFRS and IFRS for SMEs, the application of the Accrual Basis of Accounting, and eligibility for the Cash Basis of Accounting are key to compliance for taxable entities in the UAE.

Additional Resources
For more detailed information on Corporate Tax obligations for Accounting Standards and Interaction with Corporate Tax, please refer to the following resources:

• Federal Tax Authority Website

• Accounting Standards and Interaction with Corporate Tax