UAE corporate tax: Why housekeeping and material upkeep are essential

Companies must proactively work on classifying their assets to avoid potential future liabilities

Corporate tax took effect in the UAE on June 1. AFP

Do not put off for today work that you have been advised can technically be done in 12 plus nine months.

This is the amount of time you have, from the beginning of your financial year, to file and settle your tax return.

By putting off work, I’m referring to registering your entity for corporate tax, which took effect in the UAE on June 1.

Assuming your financial year end is May 31, you technically have 21 months to register. But in reality, the total is one month less, since we are already in July, and it takes about a month to complete the registration process.

Do you, as a business owner, know what your accounting year is? In talking to many such people, I’ve found that they often have no idea.

Formation documents sometimes leave the decision up to the board of directors, who, if they’ve never had an external audit, typically fail to set one.

If you have conducted an external audit, then you can take the audited period as your accounting year. Corporate tax demands that you set one.

On successfully registering, you will receive a welcome pack in Arabic and English. The more important information is sitting in the documents folder on your Emarat portal account.

This contains your corporate tax number and Generated International Banking Account Number. It’s to this bank account, held at the UAE Central Bank, that you will be paying any monies due.

For avoidance of doubt, it’s a different GIBAN than the one used for your entity’s value added tax (VAT). Do not use the wrong one.

I have yet to see a corporate tax certificate, akin to that for VAT. Given the similarities between the two, it would appear likely they will be issued.

We do not know at this time whether a transaction payment reference number will be required when settling your corporate tax liability.

That addition for VAT appeared as part of the new and expanded Federal Tax Authority managed portal in December 2022.

If you fail to include the reference number, your payment will fail and be refunded to you. This is another reason not to leave matters to the last day. I have seen cases where entities found out too late that a payment had been returned, and penalties were automatically applied.

The above is an example of housekeeping. Let us now look at the far more serious matter of maintenance.

Ministerial decision No. 120 of 2023 deals with transitional rules. At its core, how do we transition from a world without corporate tax to one with it?

I liaised with Peter Wilson, an international tax expert from PB First.

One of the first tax concepts I was introduced to at secondary school was ‘bed and breakfasting’. This means to sell an asset on the last day of a tax year, and buy it back the following day. The objective is to crystallise any gain in one tax year where such allowances cannot be carried forward.

Let’s consider an entity that has material assets on its balance sheet. It’s common in the UAE, particularly among larger groups, to hold property. It might be the entity’s office building. The ministerial decision calls this "immovable property".

Back to my school days for one more moment and another aspect of tax. We are used to talking about managing the changing value of assets in your balance sheet as "depreciation".

With buildings, we talk about "impairment", as a building is not what we might consider a normal asset, like a computer or office fittings. On disposal, it is likely to be more valuable than when you bought it. This gain is taxable.

Transition arrangements allow you to lock in that gain, thus the opening value of a qualifying immovable object, as you enter a corporate tax world, takes into account the accumulated gain and nullifies any future tax liability on disposal of the asset.

Are there any rules you need to comply with to gain this advantage? Yes. Plenty of them.

From fixed structures to intangible ones. By this, think about computer software, licences, import quotas, etc. The UAE has decided that IFRS will be the applicable accounting standards used for reporting purposes.

Valuation for corporate tax purposes demands it must be accounted for on a historical cost basis. It must also have been owned prior to an entity's first tax period, and be deemed disposed of during or after the entity's first tax period, for a value in excess of its net book value.

The majority of UAE entities have January to December accounting years.

This means that there is still time to open an entity’s balance sheet and examine tangible and intangible assets with a view to proactively and positively acting ahead of potential future corporate tax liabilities.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE