Key UAE CT actions before year-end
As the first financial year following the introduction of the Corporate Tax Law (“CT Law”) comes to a close for many businesses in the United Arab Emirates, it is important to ensure taxpayers meet statutory deadlines and understand the key technical positions which will underpin the financial reporting and audit process.
To assist businesses, we have summarized key actions to help navigate the period prior to the end of the year.
2 Pre-year-end actions required due to statutory deadlines
2.1 Corporate tax registrations
Taxable Persons must register for corporate tax within the deadlines specified by the Federal Tax Authority (“FTA”) to avoid penalties. Companies that haven't registered yet should check the deadlines and take action accordingly.
2.2 Submit Tax Group applications
Groups planning to form or join a Tax Group must submit their application to the FTA before the end of the first Tax Period. For companies with a financial year ending 31 December 2024 applications must be submitted prior to 31 December 2024.
2.3 Exemption Application:
Verify if you meet the conditions to access the entity level tax exemptions you consider are relevant, e.g.:
2.4 Small Business Relief:
Confirm eligibility for this exemption based on the revenue threshold.
2.5 Qualifying Free Zone Person (“QFZP”) status:
Assess compliance with the QFZP conditions such as adequate substance, Qualifying Income, the de-minimis threshold, and compliance with Transfer Pricing rules.
2.6 Exemption for Government Entities (“GE”), Government Controlled Entities (“GCE”) and certain of their subsidiaries (under Article 4(1)(h)):
Obtain confirmation from the relevant government body whether companies will be GEs or GCEs. GCEs will need to be listed in a (private) Cabinet Decision. For Article 4(1)(h) entities, evaluate if the conditions are met and make plans to submit an exemption application to the FTA.
2.7 Extractive and Non-Extractive Natural Resource Business exempt status:
Evaluate if there is other Business income which will be taxable, e.g. other Business income that is ancillary or incidental and exceeds 5% of total revenue.
2.8 Decide on elections
Decide on elections that will likely be made in the tax return, where these could impact the tax accounting position, e.g.:
2.8.1 Unrealised gains or losses:
Understand the election options available and the impact this irrevocable election will have.
2.8.2 Transitional Rules:
Assess whether the relevant types of assets and liabilities exist and whether this irrevocable election is expected to be advantageous.
2.8.3 Foreign permanent establishment (“PE”) exemption:
Evaluate whether the conditions are met and whether this election is expected to be advantageous when considering all foreign PEs.
2.9 Check Tax Relief Eligibility
Verify if you meet the conditions to take advantage of the tax reliefs potentially available for specific transactions undertaken in the year and other tax reduction tools, e.g.:
- Participation exemption for certain income (and losses) from Participating Interests
- Qualifying Group Relief for transfers of certain assets and liabilities between group companies
- Business Restructuring Relief for transfers of businesses in exchange for shares
- Foreign Tax Credit availability
- Ability to transfer losses between companies in the group
2.10 Determine material tax adjustments, e.g.:
- Restrictions on interest deductibility
- Entertainment expenses related to customer, shareholder, supplier or other business partner entertaining (50% restriction)
- Transfer pricing adjustments
2.11 Check Overseas Entity Tax Impact
Verify that your overseas entities do not give rise to a UAE taxable presence by assessing if overseas companies:
- Are effectively managed and controlled in the UAE
- Have a UAE permanent establishment
- Have a UAE nexus
Insights on how to effectively manage the year-end tax reporting cycle.
3 UAE Corporate Tax: effectively manage the year-end tax reporting cycle
3.1 Navigating the year-end reporting for income taxes
With the introduction of the Corporate Tax Law (“CT Law”) in the United Arab Emirates (“UAE”) timely preparation and implementation of new business processes to effectively manage the impact of the CT Law for financial reporting and audit is key. To achieve this businesses will need to update and align their processes with internal and external stakeholders to manage expectations and avoid any last minute surprises (e.g., additional disclosures in the income tax note of the financial statements). To help businesses navigate the changes to business and processes and tax reporting requirements, we have provided our insights to start initiating and planning for key topics that can be managed during the hard close and the year-end reporting cycle - where feasible. This alert is focused on the CT Law elements to the reporting cycle, but we have included several topics that should be considered if your business has operations outside of the UAE.
3.1.1 Topics to consider for hard close procedures
3.1.1.1 Business processes:
For many groups, tax will impact their financial performance for the first time and will require relevant processes to be adjusted to facilitate accurate and complete information on the impacts of income taxes in the UAE. To facilitate this, we recommend groups to align with all relevant stakeholders to ensure processes have been updated to reflect the impacts accordingly. This includes the following:
- Updating Chart of Accounts (“CoA”) for reporting on income taxes (current, deferred, profit and loss and other comprehensive income).
- Perform a health check to identify book-to-tax adjustments in the current CoA and any opportunities that can be identified for current and future tax provisioning cycle (changes to accounting policy and process might be required).
- Reflect on the current reporting cycles and timelines to factor in the additional requirements for reporting on income taxes.
3.1.1.2 Setup of the financial statements:
The financial statements (“FS”) will require adjustments and setup changes to reflect the introduction of the CT Law. we recommend timely discussions with auditors to agree on the following changes and materiality considerations:
3.1.1.2.1 Presentation:
In accordance with IAS 1 to separately present current and deferred taxes on the balance sheet, total tax expense in the profit and loss and if applicable, taxes recorded through other comprehensive income.
3.1.1.2.2 Basis of preparation:
To include the relevant basis for accounting of income taxes and any judgements or estimates that have been made.
3.1.1.2.3 Income tax note:
Prepare the skeleton of the expected income tax note based on IAS 12 requirements. For example, how to approach the reconciliation of the tax expense (the Effective Tax Rate).
3.1.1.2.4 Materiality Check:
Understanding of internal and external materiality to be applied upon preparing for tax reporting cycle at year-end.
3.1.2 Uncertain tax positions and technical considerations:
Evaluate any uncertain tax positions (“UTPs”) and technical issues arising from the CT Law that could impact your business's financial reporting for the year. The assessment should factor in the requirements that have been provided in IFRIC 23 and will be subject to the recognition criteria “more-likely-than-not”, i.e. 50% probability that the tax authorities will not accept the tax position.
3.1.2.1 Management intent for transitional relief rules and elections:
Examine the transitional rules, including the tax base of assets, to ensure accurate reporting and elections to be applied for reporting purposes (including support documentation to substantiate the position taken by the management). The timely assessment of the elections (including any tax grouping) and discussing with auditors can provide clearance and alignment to factor in the implications as part of the tax provisioning process.
3.1.2.2 Loss carryforwards or disallowed interest:
Deferred tax asset recognition can be required in the situation that entities will be in a net loss position or disallowed interest will arise. In accordance with IAS 12 requirements these positions will be subject to the recognition criterion of probable, (i.e., 50% likelihood). The net loss or interest disallowance is often clear before year-end and therefore could be discussed during the hard close phase with the relevant supporting information (e.g., taxable profit forecasts) to substantiate the recognition criteria are met.
3.1.2.3 Outside basis differences (taxes on foreign Investments obligations):
A temporary difference might arise between the investment’s carrying amount in the consolidated financial statements (the investment’s net assets) and its tax base (which is often cost or indexed cost).
This temporary difference is sometimes referred to as ‘outside basis’ difference. It arises in addition to the temporary differences relating to the investee’s underlying assets and liabilities (inside basis differences).
The temporary difference relating to the investment might arise in a number of situations. The most commonsituation is where undistributed profits in the investee increase the carrying value of the parent’s investment in the investee to above its tax cost. Therefore management should consider some of the following points:
- Will the carrying amounts for such investments or interests be recovered through distributions (use) or disposal (sale).
- Perform a detailed analysis of future tax obligations for foreign investments (subsidiaries, joint ventures, branches and associates), for example WHT’s on future dividend distributions.
- Consider relevant documentation to provide to assess the above.
3.1.3 Key takeaways and next steps for hard close
Align with key internal and external stakeholders to agree on actions, priorities and timelines to manage expectations for the next three months in terms of roles and responsibilities. This would ideally include a test-run of the changes made to process and systems to identify any gaps that might still exist providing sufficient time for required adjustments.
4 Year-end reporting considerations
After completing hard close procedures, and aligning process and controls it is time for the first effective year-end financial reporting process to start. As with many projects and deals, the tax element is often the last part of the jigsaw puzzle which means there are time constraints when preparing the tax numbers. We highly recommend factoring in sufficient time with your stakeholders - especially as this will be the first year - to allow for appropriate reviews to take place before finalizing and sharing with the auditors. Below are important items to consider during the year-end cycle to be ‘audit ready’ with all relevant supporting documentation in place to provide with the auditors.
4.1 Financial audit readiness - best practices:
In the situation that the business has used the hard close time effectively, the year-end process could be seen as ‘top-up-procedures’ to finalize the full year income tax position that will flow into the FS. To be the audit ready, we have highlighted the below topics to factor into the process for stakeholder management.
- Re-align with the auditors on expectations and required supporting documentation (tax computations, position papers and/or impact assessments).
- Plan relevant meetings with stakeholders, including kick-off and closing meetings with your auditors.
- Prepare relevant income tax notes and disclosures for the FS based on final tax numbers – including judgement and estimates paragraph.
- Alignment with the business in terms of any late audit adjustments during the final part of the audit to provide the relevant tax impacts (if any).
5 Key takeaways and next steps
Businesses must take proactive measures now to prepare for upcoming year-end reporting and compliance requirements. Tackling these tasks early can help mitigate risks and ensure seamless financial reporting and tax compliance. At PTC, our experienced team is ready to support you with every aspect of year-end preparation, including consolidation, tax provisioning, and financial audit readiness. Let us help you navigate year-end processes efficiently and meet all regulatory obligations.