I am sitting on an airplane writing this. A toddler is screaming relentlessly at the unfairness of their parent, refusing to allow them to unbuckle their belt. In life, an authority has the right to exercise just that. The child understands and ultimately, with a tear-drenched face, accepts the imbalance of power.
We grow up with this inherent understanding, which is why we cry foul when someone, who we are reasonably sure does not occupy such a position, does the same.
Recently, a trade licensing issuing authority took it upon itself to mandate that the financial year for all entities under its purview would be calendar: January to December. A standard company formation document, the memorandum of association, was universally changed for thousands of entities with the swish of a pen.
Many, including this particular authority until now, have not included a specific 12-month period at all, merely highlighting that it begins in month one and finishes 12 months later.
You might be forgiven for reading this to mean flexibility and the empowerment of entity owners, but in a corporate tax world, it just created confusion.
Throughout 2024, I found that the Federal Tax Authority accepted the month of formation or the subsequent month as the beginning, counting forward to a full year. Recently, they began changing these to the month of formation.
Fair enough. This was being done before the first year’s reporting and ultimately it is their regime.
In the accounting world, we have a concept called a short and a long year. The former is six to 11 months, the latter 13 to 18 months. A company chooses one of these if they are recently formed and want to spend their second and subsequent financial years in a particular cycle.
It is also used when this cycle is changed for what are typically good operational reasons. An entity that has been taken over or merged with another would normally realign so the group reports together.
The relevant regulatory authorities have said that such requests for movement would be facilitated and are normal practice internationally.
A trade licensing issuing body is a different matter. I want to start with the largest implication.
Juridical entities had until the end of March 2025 to update on the FTA portal any information that has gone out of date such as trade licence, passports, Emirates ID and other changes. These would include movements in ownership structure, whole or partial.
Included in this would be a change of financial year. Thirty days is given to update this change before penalties are applied.
How would the portal know that this time period has passed? I imagine that a question would be asked as to when the change occurred and supporting formal paperwork be uploaded to confirm the same. Once reviewed, calculating which side of a penalty someone is on is simple math.
There is a general assumption that the clock for notification, and thus penalties, stops at the point of submission rather than confirmation that any change has been accepted and the portal updated. This can take some weeks.
With compounding obligations in recent years, it is understandable that the supporting headcount to facilitate updates in a timely manner might take some time to adjust.
Let us ask another question. Can an entity have a financial year as dictated by the body issuing their trade licence and a different one with the governmental regime? It is possible. However, this potentially gives rise to more issues.
Not all trade licences come with a mandatory requirement to have an external audit. While external audits are not required for those businesses with a turnover under Dh50 million, a full corporate tax return requires the uploading of at least management accounts.
If an audit is required, then some businesses face the prospect of having two a year.
Let us stretch credulity a little further. UAE entities that are part of international groups will have their financials consolidated into the ultimate parent. If a subsidiary’s audited accounts are more than three months askew from the centre, then yet another separate audit needs to be conducted.
Ultimately, can a trade licence issuing authority force such a change? Legally, I do not know. What I imagine they can do is to update their core articles or memorandum of association to define a financial period where none existed.
In this case, would it override an entity that had set its own reporting period? I would argue no, it would not. However, it would remain incumbent on a business owner to formally communicate that they had held a board meeting and properly minuted the decision.
Further, the entity would need to confirm that their communication was received and that their record was updated. This is called company secretarial duties.
