In the UAE, businesses are not mandated to maintain separate books of account specifically for tax purposes. Instead, taxable income is determined based on financial statements prepared in alignment with recognized accounting standards. The accepted standards include the International Financial Reporting Standards (IFRS) and IFRS for Small and Medium-sized Enterprises (SMEs), applicable to businesses with annual revenues not exceeding AED 50 million.
FTA Guidelines and Accounting Compliance
The Federal Tax Authority (FTA) has issued guidelines emphasizing the necessity for adherence to these accounting standards. Non-compliance can lead to administrative penalties, highlighting the importance of accurate financial statement preparation as per the stipulated standards.
Accounting Basis: Cash vs. Accrual
The UAE typically requires businesses to use the accrual basis of accounting for their financial statements. Nevertheless, small businesses with total revenues under AED 3 million per tax period have the flexibility to opt for the cash basis of accounting. This alternative may also be permitted in exceptional circumstances upon approval by the FTA, offering a simplified approach for smaller enterprises.
Small Business Relief: Tax Exemption
The UAE offers a Small Business Relief scheme, providing nil tax liability regardless of actual profits or income until 31.12.2026 for businesses with annual revenues below AED 3 million. This relief allows eligible businesses to choose between IFRS, IFRS for SMEs, or the cash basis of accounting to maximize their tax benefits.
Related Party Transactions and Arm’s Length Principle
Related party transactions must be conducted at arm’s length to ensure fairness and transparency in financial reporting. If transactions are recorded at values diverging from market rates, adjustments must be made for tax purposes without incurring penalties. This underscores the need for detailed reconciliations between accounting and tax records.
Treatment of Realised and Unrealised Gains/Losses
The distinction between realized and unrealized gains and losses poses a significant accounting challenge. Realized gains are recognized upon the completion of a transaction, while unrealized gains are recorded based on fair value estimates, affecting financial statements but not necessarily taxable income. Businesses must elect their treatment of these gains or losses on their initial tax returns, a decision that is irrevocable.
The FTA’s guidelines serve as a foundational reference for businesses to ensure that their accounting practices are in full compliance with UAE tax regulations. By aligning accounting income with taxable income accurately, businesses can mitigate the risks of penalties and optimize their tax positions. Maintaining strong records and reconciliations between these two forms of income is not just a regulatory necessity but also a wise business practice in the dynamic economic landscape of the UAE.
