In July 2024, the Federal Tax Authority ("FTA") published a Corporate Tax ("CT") Public Clarification on the first Tax Period of a juridical person ("Public Clarification"). The Public Clarification provides further information around the first Tax Period for:
- A juridical person that is a Taxable Person and is subject to the UAE Commercial Companies Law;
- A Non-Resident Person who is a juridical person who has a Permanent Establishment ("PE") in the UAE;
- A Resident Person that is incorporated or otherwise established or recognized under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the UAE; and
- Timeline for Tax Deregistration in case of the cessation of Business or Business Activities before or during the first Tax Period.
In general: The UAE CT Law is applicable to Tax Periods commencing on or after 1 June 2023. Under the UAE CT Law, a Taxable Person's Tax Period is the Financial Year or part thereof for which a Tax Return is required to be filed. However, some practical queries have been raised by taxpayers with respect to their first Tax Period in the UAE.
This communication does not provide a comprehensive overview of the Public Clarification. However, below we share our observations and key takeaways from the Public Clarification, grouped as follows:
1. Juridical persons subject to UAE Commercial Companies Law: The Public Clarification clarified that the first Financial Year under the UAE Commercial Companies Law may be a period between six to 18 months, which shall be accepted as the first Tax Period for UAE CT purposes, without any need to make an application to the FTA. Where the first Financial Year commences on or after 1 June 2023, this will be the first Tax Period under the UAE CT Law. Where the first Financial Year commences before 1 June 2023, the first Tax Period will be the subsequent 12-month Financial Year commencing on or after 1 June 2023.
2. Non-resident Person with a UAE PE: According to the Public Clarification, the first Tax Period will be the Financial Year or part thereof beginning from when the PE first began operations. Where the Non-resident's activities which constituted a PE existed at 1 June 2023, the first Tax Period will be the first Financial Year commencing on or after 1 June 2023. Where a PE of a Non-resident is created on or after 1 June 2023, its first Tax Period will be the period from when it began operations until its first-year end as per its Financial Statements (provided the first Tax Period is not less than six months or more than 18 months).
3. Resident Person effectively managed and controlled in the UAE: The first Tax Period will be the Financial Year or part thereof commencing on or after 1 June 2023.
4. Pro-rata of UAE CT thresholds: Where the first Tax Period is longer or shorter than a 12-month period, Taxable Persons should not apply a pro-rata approach in respect of thresholds prescribed under the UAE CT Law, such as the threshold for application of a 0% CT rate (for Non Qualifying Free Zone Persons), the threshold for the Small Business Relief, the threshold for the requirement to prepare audited financial statements, the thresholds related to the requirement to prepare Transfer Pricing (TP) master file and local file, the threshold required for the eligibility to prepare financial statements using the Cash Basis of Accounting, the threshold required for the eligibility to prepare the financial statements using International Financial Reporting Standards for small and medium-sized entities (IFRS for SMEs); and the de-minimis requirement for a Qualifying Free Zone Person.
The only provision of the UAE CT Law which establishes a threshold that should be pro-rated in instances where the first Tax Period is longer or shorter than 12-months is the General Interest Deduction Limitation Rule, which provides that Net Interest Expenditure exceeding the higher of (i) AED 12 million; or (ii) 30% of the tax adjusted EBITDA should not be deductible for UAE CT purposes.
5. Cessation before or during the first Tax Period: When aTaxable Person ceases its activity by dissolution, liquidation or otherwise, during the first Tax Period, it is required to make an application for Tax Deregistration within three months. The fact that the Taxable Person ceases its activity during the first Tax Period does not impact its obligation to register for UAE CT purposes.
Originally published 05 August 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.