Summary of Public Clarification on Corporate Tax- First Tax Period of a Juridical Person

Through CTP003, Federal Tax Authority has clarified regarding the confusion relating to the first tax period of a juridical person, generally companies.

We are going to read in this article a short summary of the Public Clarification document for determining the first tax period for a company under UAE Corporate Tax Law.

Public Clarification covered below person’s first tax period;

• A UAE company which is subject to Commercial Companies Law.
• A foreign company which has a permanent establishment in the UAE
• A foreign company which is effectively managed and controlled from UAE.

In this article, we are going to focus on the first Corporate Tax period for A UAE Company subject to Commercial Companies Law

The legal type in UAE like Limited Liability Companies, Limited Liability Partnership, Public and Private Joint Stock companies, foreign companies head office or branch or representative offices in UAE etc. are coming under the purview of Federal Decree-Law No.32 of 2021 which is Commercial Companies Law.

Such companies need to check Commercial Companies Law to determine their first financial year which will be eventually their first Corporate Tax year/period. This is applicable for Free Zone companies as well in the UAE.

The first financial year is determined in Commercial Companies Law as below;

• The first financial year should not be less than 6 months in the year of company incorporation. Example: - If a company whose financial period is January to December, sets their company in UAE in the month of March 2024. During the year 2024 (March 2024 to December 2024), the company is in existence of more than 6 months and the first financial year will be March 2024 to December 2024.
• The first financial year should not be more than 18 months. Example: - A company whose financial period is April to March. They set up the company in the month of January 2024. The company is in existence for less than 6 months while considering the period January 2024 to March 2024. In such cases, companies shall extend their first financial year up to 18 months. Thus, the first financial year for the company will be from January 2024 to March 2025  (15 months)

The subsequent financial year will always be a 12-month period.

The Corporate Tax period is determined as per the financial year of the company and it is very important to make the understanding of financial year for necessary preparation for Corporate Tax in UAE. While applying for Corporate Tax registration, the taxable person has to elect the Corporate Tax period. The first tax period can be any period between 6 months to 18 months depending on the financial year of the company.

A table summary with a few examples:-

While applying for Corporate Tax registration, no need to elect a longer or shorter tax period, FTA automatically upgrade the first period according to the financial year as per Commercial Companies Law.

Here comes the next question in mind that if a company whose first tax year is less than 12 months or more than 12 months, will there be any changes in the reliefs or thresholds? FTA has clarified that there will no pro-rate allocation in the below even if the first tax year is longer or shorter.

• AED 375,000/- band of 0% Corporate Tax.
• AED 3,000,000/- band for Small Business Relief.
• Requirement to prepare audited financial statement where the revenue in a tax period is more than AED 50 Million.
• Revenue threshold for preparation of Master File and Local File under Transfer Pricing regulations.
• Eligibility for preparation of cash basis account which is AED 3 Million in a tax year
• Application of full IFRS of IFRS for SMEs revenue threshold which is AED 50 Million in a tax year.
• De-minims requirement for qualifying free zone person in a tax period.

Only exception to the above is the Interest capping limitation, for those it is applicable, which is AED 12 million or 30% EBITDA. Pro-rate allocation is applicable for Interest capping rule based on the shorter or longer tax period.

CTP003 Corporate Tax Public Clarification First Tax Period of a juridical person  has further outlined scenarios where the company is liquidated/ceased business activities before or during the first activities. We have written a detailed article on Corporate Tax compliance to be taken care by business owners while liquidating their business/company Read here.

To learn more about Public Clarification on Corporate Tax- First Tax Period of a Juridical Person, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.