Understanding Public Tax Clarification on First Tax Period of a juridical person by FTA (CTP003)

Key Provisions for the First Tax Period

1. Financial Year Definition:

   • The financial year for a taxable person under the Corporate Tax Law can be the Gregorian calendar year or a custom 12-month period.

   • The first financial year can vary in length from 6 to 18 months, depending on the entity’s incorporation date and financial statement preparation.

2. Juridical Persons under the Commercial Companies Law:

   • The first financial year is specified in the entity’s statute or constitution and must range between 6 and 18 months from incorporation.

   • Subsequent financial years must be 12 months each, starting immediately after the previous financial year.

   • If the first financial year starts on or after June 1, 2023, it is considered the first tax period.

3. First Tax Period Scenarios:

   • 12-month period: The first tax period aligns with the 12-month financial year.

   • 6 to 12 months period: The FTA accepts this period without requiring an application for a change.

   • 12 to 18 months period: Similarly, the FTA accepts this period without needing an application for a change.

4. Non-Resident Persons with Permanent Establishments:

   • The first tax period begins from the date operations commence and must last between 6 and 18 months.

   • Permanent establishments recognized by the existence of a fixed place of business or through a dependent agent start their tax period based on when operations begin or the agent’s authority is first exercised.

5. Resident Persons Managed in the UAE:

   • For entities incorporated or recognized under foreign legislation but effectively managed in the UAE, the first tax period starts on or after June 1, 2023.

Compliance with Tax Deregistration Timelines

Entities that cease operations before or during their first tax period must apply for tax deregistration within three months of cessation. This requirement remains irrespective of the deadline set by the FTA for registration. The cessation of business activities does not absolve the entity from the obligation to register for corporate tax if it occurs during the first tax period.

Practical Examples for Clarity

Example 1: A company incorporated on February 1, 2023, with a financial year from January 1 to December 31, will have its first financial year from February 1, 2023, to December 31, 2023. If this company is taxable under the Corporate Tax Law, its first tax period will start on January 1, 2024, to December 31, 2024, aligning with the subsequent calendar years.

Example 2: A company incorporated on February 1, 2023, with a financial year from April 1 to March 31, will have its first financial year from February 1, 2023, to March 31, 2024. If this company is a taxable person, its first tax period under the Corporate Tax Law will start on April 1, 2024, to March 31, 2025.

Example 3: A company incorporated on February 1, 2023, with a financial year from September 1 to August 31, will have its first financial year from February 1, 2023, to August 31, 2023. If this company is a taxable person, its first tax period under the Corporate Tax Law will start on September 1, 2023, to August 31, 2024.

Example 4: A company incorporated on June 5, 2023, with a financial year corresponding to the calendar year, will have its first financial year from June 5, 2023, to December 31, 2023. As a taxable person under the Corporate Tax Law, its first tax period will be the same as its first financial year, from June 5, 2023, to December 31, 2023. Subsequent tax periods will be from January 1 to December 31 of each year.

Example 5: A company incorporated on August 16, 2023, with a financial year from January 1 to December 31, will have its first financial year from August 16, 2023, to December 31, 2024. As a taxable person under the Corporate Tax Law, its first tax period will be the same as its first financial year, from August 16, 2023, to December 31, 2024. Subsequent tax periods will follow the Gregorian calendar year.

Example 6: A non-resident person with a fixed place of business in the UAE that commenced operations on February 1, 2022, and continues to operate, will have its first tax period under the Corporate Tax Law starting on February 1, 2024, to January 31, 2025. This period will be the first 12-month period commencing on or after June 1, 2023. Subsequent tax periods will follow the same 12-month cycle.

Example 7: A non-resident person with a dependent agent exercising authority in the UAE since March 1, 2021, will have a permanent establishment recognized from June 1, 2023. The first tax period for this non-resident person will be from March 1, 2024, to February 28, 2025. Subsequent tax periods will align with the financial year from March 1 to February 28/29 of each year.

Example 8: A company incorporated in another country but effectively managed in the UAE, with a financial year from January 1 to December 31, will have its first tax period under the Corporate Tax Law from January 1, 2024, to December 31, 2024. This period aligns with the first financial year commencing on or after June 1, 2023.

Example 9: A company incorporated on December 20, 2023, with a financial year from September 1 to August 31, will have its first financial year from December 20, 2023, to August 31, 2024. The first tax period under the Corporate Tax Law will be from September 1, 2023, to August 31, 2024.

Impact on Tax Thresholds and Compliance

The document emphasizes that tax thresholds are not pro-rated for first tax periods shorter or longer than 12 months, except for the general interest deduction limitation. Key tax thresholds include:

• Taxable Income Threshold: AED 375,000 is subject to 0% corporate tax.

• Small Business Relief: Revenue should not exceed AED 3 million per tax period.

• Audited Financial Statements: Required if revenue exceeds AED 50 million.

• Transfer Pricing Documentation: Required if the taxable person is part of a multinational group with consolidated group revenue of AED 3.15 billion or if the taxable person’s revenue exceeds AED 200 million.

• Cash Basis Accounting: Revenue should not exceed AED 3 million.

• IFRS for SMEs: Revenue should not exceed AED 50 million.

The general interest deduction limitation threshold is AED 12 million and is adjusted proportionally based on the length of the tax period if it is not exactly 12 months.

Conclusion

Understanding the first tax period requirements under the UAE’s Corporate Tax Law is essential for juridical persons and businesses using Profitrack Accounting. By adhering to the defined financial year periods, compliance timelines, and tax thresholds, businesses can ensure seamless integration with the new tax regime. Profitrack Accounting’s advanced features and compliance tools support businesses in navigating these regulations effectively.

Disclaimer: The above opinion is based on our understanding. For more information and clarification, please visit tax.gov.ae.