Understanding the First Tax Period for Juridical Persons under UAE Corporate Tax Law

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The Corporate Tax Law is effective from 1 June 2023, i.e., it applies to tax periods starting on or after 1 June 2023. Taxpayers covered within the ambit of this law must prepare their financial statements and file tax returns with respect to a “tax period”.

Typically, the tax period corresponds to the Gregorian calendar year or a 12-month period for which financial statements are prepared. The FTA recently issued a public clarification on the first tax period of a juridical person. 

Let’s understand the details of the first tax period under the CT Law.

Determining the First Tax Period for Juridical Persons

The CT law categorizes juridical persons into several groups, each with specific considerations for the first tax period:

1. Juridical Persons under the Commercial Companies Law:

These entities include those incorporated under the UAE Commercial Companies Law, such as joint liability companies, limited liability companies, public and private joint stock companies, and foreign companies with a UAE branch or representative office. The financial year (FY) followed by the taxable person under the Commercial Companies Law will be considered as the tax period for the CT Law.

The first FY of a newly incorporated company under the Commercial Companies Law can range between 6 and 18 months, depending on the company’s incorporation date and its articles of association. The subsequent FYs are consecutive periods, each of 12 months commencing upon the expiry of the preceding FY.

The following table helps to understand the tax period of a company:

* First FY commencing on or after 1 June 2023

2. Non-Resident Persons with a Permanent Establishment:

For non-resident juridical persons with a permanent establishment (PE) in the UAE, the first tax period begins from the start of operations of the PE.

For example, on 1 August 2024, a non-resident person creates a branch (a fixed place of business) in the UAE through which it operates and continues to operate for the foreseeable future. After 6 months (1 February 2025), the PE exists. If the non-resident’s FY is the calendar year, the first Tax Period will be 1 August 2024 to 31 December 2025.

3. Resident Persons Managed and Controlled in the UAE:

Juridical persons effectively managed and controlled in the UAE, but incorporated abroad, will have their first tax period based on their financial year starting on or after June 1, 2023.

For example, a foreign company effectively managed from the UAE, with its financial year starting on 1 September 2023, will have its first tax period from 1 September 2023 to 31 August 2024.

Special Considerations and Applications

The CT Law allows for flexibility in determining the first tax period but stipulates certain conditions:

• The first FY must be between 6 and 18 months; and 
• No application is required to the FTA if the first financial year falls within this range.

Where the first tax period is longer or shorter than a 12-month period, there is no pro-rating of the various thresholds as these thresholds apply in respect of each “tax period”. These include:

• Revenue threshold exceeding AED 375,000 for application of 9% tax rate; 
• Revenue threshold not exceeding AED 3 million for small business relief; 
• Revenue threshold exceeding AED 50 million for preparing and maintaining audited financial statements; 
• Consolidated group revenue of AED 3.15 billion more or taxable person’s revenue exceeding AED 200 million for preparation of master file and local file; 
• Revenue threshold not exceeding AED 3 million for preparing financial statements on cash basis; 
• Revenue threshold not exceeding AED 50 million for preparing financial statements as per IFRS for SMEs; and 
• Revenue threshold for qualifying as a Qualifying Free Zone Person (QFZP). 

However, there is an exception. Normally, there is no interest limitation if the net interest expenditure in a tax period does not exceed AED 12 million. However, where the relevant tax period of a taxable person is more or less than 12 months, the de-minimis limit for applicability of General Interest Deduction Limitation Rule (i.e., AED 12 million) shall be adjusted in proportion to the length of the Tax Period.

Cessation during the First Tax Period

If a taxable person ceases business activities, by way of liquidation or dissolution, during the first tax period, they must apply for tax deregistration within three months of cessation. However, this does not affect the obligation to register for corporate tax initially.

Conclusion

FTA’s clarification discusses about the determination of the first tax period in great detail. It also carves out that the duration of the tax period will not impact various thresholds under the CT Law. 

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.