Overview of UAE Accounting and Taxation

Delivering the latest information on UAE Accounting and Taxation.

UAE Accounting and Tax Obligations - Overview of UAE Accounting and Taxation and Implementation

Accounting is the foundation of business operations. As a key management indicator, it ensures tax compliance, and facilitates the presentation of financial statements to stakeholders. Accounting plays a critical role in business success.

While accounting systems differ by country, the UAE increasingly demands accounting transparency each year. As the country experiences rapid growth, systems and procedures change dynamically, making it essential to stay informed of the latest information. This article provides an introduction to accounting in the UAE.

After Reading This Article…

• Understand the overall picture of accounting practices in the UAE

• Understand the overview of the UAE tax system

• Understand how to implement accounting in the UAE

1. UAE Accounting Overview

The United Arab Emirates is a confederation of seven emirates with a diverse economic portfolio spanning from oil exports to tourism, trade, real estate, and financial services.

The most widely used accounting standard in the UAE is IFRS (International Financial Reporting Standards). Financial statements not conforming to IFRS may be considered incorrect by stakeholders and may not be accepted by banks or government. In the UAE, VAT is a tax imposed on the consumption or use of goods and services.

In the UAE, VAT (Value Added Tax) was introduced in 2018, and Corporate Income Tax was introduced in 2023, both regulated by the FTA (Federal Tax Authority). Enterprises or individuals meeting certain requirements must register with the FTA for VAT and Corporate Income Tax compliance, filing regular declarations and tax payments. Companies that fail to register on time or miss filing deadlines are subject to fines and other penalties. Currently, the UAE does not impose regular social insurance contributions for employees or personal income taxation.

Generally, record-keeping requires using accounting software compliant with UAE tax regulations such as VAT. When asked whether Japanese cloud accounting software can substitute, it is recommended to use software with functions tailored to local accounting requirements. Cloud-based subscription software is widely used in the UAE.

Accounting audits may not be mandatory depending on company type and establishment location, but may become necessary unexpectedly, so it is recommended to undergo them.

Let us examine each aspect individually.

2. Bookkeeping in the UAE

What is IFRS Accounting Standard?

In the UAE, accounting is generally performed in compliance with International Financial Reporting Standards (IFRS). IFRS is an accounting standard established by the International Accounting Standards Board (IASB) and is internationally understood and accepted by companies and investors.

IFRS has many similarities with Japanese accounting standards and is relatively easy to become familiar with. However, while Japanese accounting has finely defined rules, IFRS emphasizes the substance of transactions and events through a principles-based framework. For example, you determine the depreciation period of assets based on your company's judgment. In the UAE, financial statements not complying with IFRS may be rejected by auditors during the audit process.

Typical Financial Statements Under IFRS:

• Balance Sheet

• Income Statement

• Cash Flow Statement

• Statement of Changes in Shareholders' Equity

**Is Maintaining Books Mandatory?**

Under UAE company law, all companies in the UAE are required to maintain accounting records for five years from fiscal year-end. All joint stock companies or limited liability companies must appoint at least one auditor to conduct annual audits. Companies must use international accounting standards and prepare annual financial statements including balance sheets and income statements to accurately show the company's results.

Additionally, Dubai Mainland company bylaws require companies to prepare balance sheets and income statements, annual reports on business activities and financial condition, and submit profit distribution proposals to shareholders for approval. Balance sheets and income statements must be submitted to shareholders for their approval. When dividends are actually distributed, they are calculated and paid based on this annual report.

In practice, Free Zones, which have special regulations and incentives to attract foreign investors, operate with some degree of autonomy under their own regulations. While audit documentation submission may not always be mandatory, accounting record maintenance is generally required across all Free Zones.

For business operations, accurate record-keeping is essential for VAT and other tax compliance, financial transparency, and proper business assessment. Without understanding your financial situation, you may miss reaching the VAT threshold and experience registration delays. Various scenarios may arise, such as being suddenly required to submit audits or financial records by government or banks, or UAE regulations changing. It is important to be prepared to respond promptly when the need arises. Enterprises that fail to maintain proper financial records face penalties and legal action.

Examples of Situations Requiring Financial Statements:

• In some regions/industries, financial statements must be submitted when renewing company licenses (such as some Free Zones)

• Determining VAT and Corporate Income Tax registration requirements

• Bank borrowing

• Company liquidation

• Shareholder requests for financial statements

**How Are Invoices and Receipt Documents Managed?**

Especially in the UAE, where regulatory compliance is a priority, managing accounting support documents is extremely important. When requested by government authorities, documents must be submitted promptly, so maintaining them regularly is essential.

The retention period for accounting records is governed by the Federal Commercial Companies Law No. 2 of 2015, which requires companies to retain records for a minimum of five years. *There are exceptions such as equipment (10 years) and real estate (15 years).

Types of Documents to Retain:

• Purchase and sales invoices

• Bank statements

• Receipts: All operating and capital expenses

• Contracts and agreements: Lease agreements, supplier contracts, service contracts, etc.

• Salary records: Payroll details, bonuses, and other employee-related expenses

• Import and export documents

• VAT records: If VAT-registered, all VAT-related documents including Tax Invoices, Tax Credit Notes, tax returns, and other related documents

For VAT declarations, it is important to follow the prescribed format for invoices and credit notes.

Credit Note: A document issued to reduce the billing amount due to product returns or invoice errors.

3. UAE Accounting Software

With the introduction of VAT in 2018, accounting software capable of handling VAT calculations, declarations, and filings became commonly used. There is also software approved by the FTA (Federal Tax Authority).

Examples of Accounting Software Include:

- Zoho Books - Odoo - Sage - Tally - SAP - Others

QuickBooks *Not registered, but this software is also well-known.

Cloud-based subscription software, where contract amounts vary based on the number of available accounts and services, is commonly used and can be utilized with relatively low budgets. Select services based on company size and business content.

Ease of use is also important. Many services offer trial periods, so verify whether the software is intuitive to use. Many services provide various features such as invoice format customization, direct invoice sending to customers, and payment links attached to invoices. For large enterprises, there are software solutions that integrate with other business software such as CRM, ERP, e-commerce platforms, and payment gateways.

When purchasing software through sales resellers, the reseller provides software explanations, but service levels vary significantly among resellers, so caution is needed. Training and paid services such as account code implementation are available, so it's beneficial to inquire about these when implementing software. These services are best requested when purchasing software from the vendor.

Japanese accounting software does not comply with UAE tax requirements, so it is not recommended.

4. Auditing in the UAE

**Audit Requirements**

In principle, enterprises operating in the UAE are required to undergo audits of their financial statements by independent licensed audit firms. However, depending on the region where the company operates and the company type, audit reports may not be required.

Whether audits are mandatory for free zone enterprises is determined by the regulations of each free zone. As a general trend, most free zones require annual audits of enterprises, and audited financial statements must be submitted within the deadline set by each authority. Enterprises without a primary focus on domestic UAE business may choose to establish companies in free zones such as Meydan Free Zone or Dubai Silicon Oasis (DSO), which currently do not mandate audits.

However, even when not mandatory, conducting regular audits establishes company credibility and is prudent for adapting to the rapidly changing UAE regulatory environment by preparing proper financial statements and undergoing audits.

**Audit Procedures**

Auditors are typically engaged from independent third-party organizations with no conflict of interest with the company. Financial statements output from accounting software (trial balances, etc.) and bank statements are submitted to the auditors.

Following auditor requests, companies submit additional documents and explanations. Ultimately, the auditor issues an Audit Report. In cases of small local audit firms, reports may only be produced in Arabic, so verify this in advance.

5. What is VAT in the UAE?

VAT is similar to consumption tax in Japan. It is an indirect tax levied on the consumption or use of most goods and services (except certain specific products and services), and was introduced in the UAE from January 1, 2018. Enterprises collect VAT from customers and remit it to the government. Similarly, enterprises can receive reimbursement from the government for taxes paid to suppliers, so in practice they pay the difference when filing their tax returns.

**VAT Registration**

VAT registration is mandatory when sales reach a certain threshold, regardless of whether the company is based on the Mainland or in a Free Zone. Late registration results in fines.

Voluntary Registration: You can choose to register for VAT if your sales in the past 12 months exceed AED 187,500 or are expected to exceed the voluntary threshold within the next 30 days.

Mandatory Registration: VAT registration is required if your sales in the past 12 months reach AED 375,000 or are expected to exceed the mandatory threshold within the next 30 days.

**UAE VAT Tax Rates Are Classified as Follows:**

• Standard Rate: 5%

• Zero-Rated Goods: 0%

• Exempt Items: N/A

The standard rate applies based on the consumption location of services and products. Basically, goods and services consumed in the UAE must be taxed at 5%.

Zero-rated goods are items shipped outside the country or services used abroad, including passenger transportation, international transportation-related services, education services, and healthcare services.

Exempt goods include life insurance, residential buildings, land, and local passenger transportation.

Services provided to enterprises and individuals residing in the UAE are taxed at 5%. Services provided to enterprises or individuals residing in Japan are taxed at 0%.

**VAT Calculation**

VAT collected from customers for goods/services provided... (1) VAT paid on purchases and expenses... (2)

The difference between (1) and (2) is paid to the government.

**VAT Filing**

Upon completion of VAT registration, a VAT registration certificate is issued. VAT filings are made during the VAT period, which is generally every three months, with declarations made in the following month.

Even if VAT payable is 0 AED, a declaration stating this is required. Late declarations, missed declarations, and filing errors may result in substantial penalties and fines.

If the VAT to be refunded exceeds the VAT to be paid, the enterprise can claim a VAT refund. However, refund approval requires strict FTA inspection.

**VAT Invoices (Tax Invoices)**

In the UAE, VAT-registered businesses must issue tax invoices in the specific format prescribed by the FTA. Conversely, businesses not registered for VAT cannot create tax invoices.

Tax invoices serve as evidence of the supply of goods or services and the VAT charged on those supplies, making them extremely important. Similarly, ensure that supplier invoices received in response to orders follow the same format. If these invoices are not accepted as supporting documents, it can lead to penalties or complicated procedures during VAT declarations or FTA audits. Additionally, VAT paid on purchased goods cannot be claimed as Input VAT in VAT declarations.

Information to Include on Invoices:

• Title "TAX INVOICE"

• Supplier name, address, TRN

• Recipient name, address, TRN: If the recipient is VAT-registered, also include their name, address, and TRN

• Invoice number

• Tax invoice issuance date

• Description of goods or services

• Unit price, quantity, tax rate

• Discount amount

• Total payment amount including VAT (AED)

• Tax amount in AED

6. Corporate Tax in the UAE

Corporate Income Tax (CIT) applies to fiscal years beginning from 2023 onwards. The following is a brief overview:

**Corporate Tax Registration**

Corporate Tax registration must be completed within nine months of the end of a fiscal year beginning from 2023 onwards. For example, if a company's fiscal year begins in 2024 and ends in December 2024, registration must be completed by the end of 2025.

**Corporate Tax Rates and Applicable Entities**

The tax rates are as follows:

• If pre-tax profit is less than AED 375,000, the rate is 0%

• If pre-tax profit exceeds AED 375,000, the rate is 9%

Corporate Income Tax rates for Free Zone enterprises are said to be 0%, but due to unclear guidance on treatment of foreign sales, there is a possibility that Corporate Tax may apply. In cases of appropriate activities or appropriate Free Zones, Corporate Tax may be exempted. Otherwise, audit documentation is required (documents from the period after company establishment, not from the target year). When filing Corporate Tax, while audit documentation is not required, documents such as income statements, balance sheets, and Corporate Tax calculation statements that can be properly attached to the Corporate Tax return are required. Further updates from the government are expected regarding detailed Corporate Tax filing and tax-exempt business registration. We will update this information separately.

**Corporate Tax Filing**

Declarations must be filed within nine months of fiscal year-end. The filing method involves the accountant preparing Corporate Tax calculation documents separately from audit documentation, which are then submitted. Basically, finding an accountant who will file Corporate Tax without an audit may generally be difficult.

7. UAE Fiscal Year

In the UAE, the fiscal year is determined by the rules of the articles of association based on company law. In English, the last day of the fiscal year is called the Financial Year End Date.

In the UAE, the fiscal year generally begins in January and ends in December. Typically, UAE mainland companies include the fiscal year in the MOA before signing. If there are changes, the renewal timing can be determined.

Examples of Fiscal Year Setting:

If the company establishment date is March 16, 2023, the following are example candidates:

• March 16, 2023 to December 31, 2023: January to December - the standard fiscal year in the UAE

• March 16, 2023 to September 30, 2023: October to September - based on establishment date, setting the first fiscal year to the minimum of 6 months

• March 16, 2023 to August 30, 2024: September to August - based on establishment date, setting the first fiscal year to the maximum of 18 months

Summary of UAE Accounting

Looking at UAE accounting, while the UAE tax system is mainly limited to Value Added Tax and Corporate Tax, financial documents are required in various situations, such as when company licenses need to be renewed for audits.

Additionally, as the UAE grows as a nation and its tax system changes, financial transparency has become increasingly strict, and regulatory changes are implemented dynamically. To avoid penalties and fines, advance preparation is essential.

Accounting is the foundation of company management and an important element in growing the business. Biz Easy provides comprehensive support ranging from accounting and tax compliance advice to operational outsourcing. We aim to provide clear and understandable explanations and handle complex tasks on your behalf, allowing your company to focus more on business growth.

If you are interested, please feel free to contact us.

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Reference Links

FTA / Know Your Tax Obligations