With the first entities in the UAE having completed two corporate tax returns, many will feel it is time to look again at their fiscal year. This is the period they report financials for, and some are considering changing it.
The process of registration was unclear to many when corporate tax began. Twelve-month periods were the only options available, and this remains the case on the Federal Tax Authority portal.
June 2023 was the first month it applied, so this left many wondering what to do if their official year began in March and finished in the following February.
Would two sets of accounts be required: one for the business year and a second one for June to February? The latter would have a potential tax liability. Given the inability to choose anything other than a calendar year, would a different period be imposed?
This was understandably confusing.
The issue was compounded for many small and medium enterprises in the UAE. As financial reporting was not legally required, many did not have a formal fiscal year. Additionally, some did not even have an internally documented process to fully capture financial performance. Instead, many depended on revenue and money in the bank to gauge performance. The notion of conducting an annual external audit was alien.
Many of the businesses' formation documents further confused the matter. Typically, you find this information in your articles or memorandum of association. Along with your trade licence, certificate of formation, share certificates, Ejari, these form the pack you receive on setting up a company.
Very often, determining the financial year was left to the business. Why would a licensing authority set your financial year?
Common wording was “the entity’s financial year will begin on the date of formation and continue for no longer than 12 months and no shorter than six months. Thereafter it will be 12 months”.
But, how many have even read these documents in detail? In my experience, not many.
In registering, applicants were asked if they were sure of their choice. With a Dh10,000 penalty for not starting the process on time, many made their best guess and pressed the submit button.
This was followed up, with many asked whether they meant what they had selected. Without any guidance within the question, many had little option but to stand by their initial decision.
That leads us to a current phenomenon. There appears to be a movement towards making everything calendar, although you can still opt to sit outside this. What is particularly interesting is that this movement does not seem to be coming from the regulatory authorities, but from the licence issuers.
Have you been sent an unrequested and suggested update to your articles or memorandum of association? If so, did you sign it? Did you read it before signing it, comparing it with the previous version?
Print both out and pore through the two documents. My guess is that the big change is your fiscal year.
You might not be too concerned about such a change, but it puts an onus on you to inform other parties, specifically the Federal Tax Authority. You must apply for a change of reporting year. This application comes with the requirement to supply supporting documentation to demonstrate that your company operates under best company secretarial practices.
If you signed the new document many months ago, you may have reported for corporate tax in the interim. Now you discover that your reporting year was different. You signed to change it, so you own the error.
Is it a simple matter of changing it back to the original? Will your licensing authority allow you? It may have decided that all its entities must be calendar. What are the fees if they do? How long will it take? What are the implications for filings made when legally the reporting periods were different?
What I do not know is the time requirement, if there is one, to initiate the change on the Federal Tax Authority portal. We know that penalties are applied where updates are not informed in a timely manner.
I have written before about the need to address company secretarial duties with the care and attention that they deserve. Are you convinced yet?
