The UAE has provided further clarity regarding the rules surrounding Corporate Tax payments. The Federal Tax Authority (FTA) has issued a Public Clarification to ensure that newly established companies understand how their first Tax Period is determined according to the UAE’s Corporate Tax Law.
According to the FTA, for juridical persons subject to Corporate Tax, the initial Tax Period is based on the first Financial Year as defined by the Commercial Companies Law. The Corporate Tax Law is applicable to Tax Periods starting from June 1, 2023.
This latest Public Clarification from the FTA aims to raise awareness about these rules, particularly for businesses established under the Commercial Companies Law.
The clarification also touches upon the necessary steps for Tax Deregistration if a business ceases operations before or during its first Tax Period.
The tax authority considers the period starting on or after June 1, 2023, the first tax period for corporate tax purposes for all new companies whose financial year begins on or after that date. If a company’s Financial Year under the Commercial Companies Law spans between 6 to 18 months instead of the standard 12 months, the FTA will still recognize this as the first Tax Period for Corporate Tax purposes.
However, if the first Financial Year starts before June 1, 2023, the first Tax Period will be the next 12-month Financial Year beginning on or after that date. Each subsequent Tax Period will follow the end of the first one.
The FTA also emphasized that the Public Clarification illuminates the first Tax Period for various entities, including juridical persons under the Commercial Companies Law, Non-Resident Persons with Permanent Establishments in the UAE, and Resident Persons managed within the UAE but incorporated abroad.
The clarification further notes that a Taxable Person’s Tax Period aligns with their Financial Year, which could either follow the Gregorian calendar year or any 12-month period used for preparing financial statements.
The FTA confirmed that no additional application is needed to change the Tax Period if it aligns with the Financial Year as per the Commercial Companies Law.
Moreover, the Public Clarification highlighted that for Financial Years shorter or longer than 12 months, there is no adjustment to the thresholds set by the Corporate Tax Law, except for the de minimis threshold concerning the General Interest Deduction Limitation Rule, currently set at AED12 million.
For Non-Resident Persons with Permanent Establishments in the UAE, the first Tax Period will start when the establishment begins operations. If these operations began before June 1, 2023, the first Tax Period will be the next Financial Year starting on or after that date. If operations commenced after June 1, 2023, the first Tax Period will start from the date operations began and will continue until the end of that Financial Year, provided the period is between 6 and 18 months.
Additionally, the FTA clarified that the Financial Year starting on or after June 1, 2023, marks the beginning of the first Tax Period for juridical persons operating under foreign legislation but effectively managed in the UAE.
Finally, the Public Clarification pointed out that if a business ceases operations during its first Tax Period, it must still apply for Tax Deregistration. The cessation of activities does not negate the obligation to register for Corporate Tax. Taxpayers must submit a Tax Deregistration application within three months of the triggering event in such cases.
