Are you maintaining books in foreign currency?

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Under UAE corporate tax regulations, companies must follow IFRS or IFRS for SMEs for accounting purposes. Exchange gains and losses are typically recorded based on accrual accounting, meaning they are recognized when they occur rather than when cash is received or paid.

Allowability of Exchange Gain and Loss for Tax Purposes

• Unrealized Exchange Gain/Loss: If a company uses the accrual basis of accounting, unrealized exchange gains or losses (e.g., revaluation of foreign currency receivables / payables) are included in the financial statements but can be excluded from taxable income if the company elects to follow the realization basis.
  
  
• Realized Exchange Gain/Loss: Exchange gains and losses that are realized (e.g., actual payment or receipt in foreign currency) are considered part of taxable income and cannot be deferred.

Electing the Realization Basis for Exchange Losses

UAE corporate tax allows companies to elect for a realization basis of accounting, meaning that unrealized exchange gains or losses are ignored until they are realized (i.e., when the related asset or liability is settled). However:

• Only unrealized gains/losses related to capital account items (e.g., long-term investments, fixed assets, loans) can be deferred.
  
  
• Unrealized exchange gains and losses on revenue account (e.g., trade receivables, trade payables) must be recognized on an accrual basis.

In case you are maintaining books in foreign currency, ensure to recognize exchange gain and loss based on 

• (a) revenue account (only option is to recognize based on accrual basis); and
  
  
• (b) capital account (option available to recognize on accrual or realization basis).
  
  

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