UAE Accounting Overview - Processes and Procedures

Delivering the latest information on UAE accounting overview and procedures.

Accounting is fundamental to business operations. It serves as a key business indicator, ensures tax compliance, and enables the presentation of financial statements to stakeholders. Accounting plays a critical role in business success.

Accounting systems vary by country. In the UAE, accounting transparency is increasingly demanded each year. As the UAE experiences rapid national growth, the systems and procedures change dynamically, making it essential to stay informed with the latest information. This article explains the overview of UAE accounting.

After Reading This Article…

• Understand the overall picture of accounting practices in the UAE

• Understand the overview of UAE tax system

• See the path to implementing accounting in the UAE

Chapter 1: Overview of UAE Accounting

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

The most commonly used accounting standard in the UAE is IFRS (International Financial Reporting Standards). Financial statements that do not comply with IFRS may not be considered correct by stakeholders and may not be accepted by banks or government. In the UAE, VAT (Value Added Tax) 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 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 Tax, following the rules and submitting regular declarations and tax payments. Delayed registration or failure to file returns may result in penalties and fines. Currently, in the UAE, there are no regular social insurance contributions for employees or personal income taxation.

For record-keeping, it is common practice to use accounting software compliant with UAE tax regulations such as VAT. Many people ask whether Japanese cloud accounting software can be used as a substitute, but it is recommended to use software with functions tailored to local accounting. Cloud-based subscription software is widely used in the UAE.

Accounting audits are not mandatory depending on company type and establishment location, but they may be suddenly requested by authorities, so it is recommended to undergo them.

Let us examine each element in turn.

Chapter 2: What is Bookkeeping in the UAE?

What is IFRS Accounting Standard?

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

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

Representative Financial Statements under IFRS:

- Balance Sheet - Income Statement - Cash Flow Statement - Statement of Changes in Equity

**Must Books Be Maintained?**

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

Additionally, under the articles of association of Dubai Mainland enterprises, companies must prepare balance sheets and income statements, annual reports on business activities and financial condition, and profit distribution proposals to be submitted to shareholders. Balance sheets and income statements must be submitted to shareholders for approval. When dividends are actually paid, 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 a certain degree of autonomy under their own regulations, and while audit document submissions may not always be mandatory, accounting records are generally required across all Free Zones.

For business operations, accurate record-keeping is essential for tax compliance such as VAT, financial transparency, and proper business assessment. Without understanding your financial situation, you may miss reaching the VAT threshold, resulting in registration delays. Various scenarios can be anticipated, such as being suddenly required to submit audits or financial records by government or banks, or UAE regulations changing. It is important to prepare to respond promptly when the need arises. Enterprises that do not maintain proper financial records face the risk of fines and legal action.

Examples of Cases Where Financial Statements Are Required:

- In some regions/industries, financial statements must be submitted when renewing company licenses (such as some Free Zones) - Judgment of VAT and Corporate Tax registration requirements - Bank borrowing - Company liquidation - Shareholder requests for financial statements

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

Managing documents that serve as accounting support is extremely important, especially in the UAE where regulatory compliance is emphasized. If requested by government authorities, documents must be submitted promptly, so it is important to maintain them regularly.

The retention period for accounting records is governed by the Federal Law No. 2 of 2015 on Commercial Companies, which requires companies to retain accounting 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 transaction statements - Receipts: All operating and capital expenses - Contracts and agreements: Lease agreements, supplier contracts, service contracts, etc. - Salary records: Payroll, bonuses, and other employee-related expenses - Import and export documents - VAT records: If registered for VAT, all VAT-related documents such as Tax Invoices, Tax Credit Notes, tax returns, and other related documents

Basically, digital data is acceptable. Additionally, 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.

Chapter 3: What is 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:

- Zoho Books - Odoo - QuickBooks

Cloud-based subscription software, where the cost varies based on the number of accounts and services available, is commonly used and can be used with relatively low budgets. Choose services based on your company size and business content.

Ease of use is also important. Most of them come with trial periods, so verify whether they are intuitive to use. There are also various features such as invoice format customization, direct invoice sending to clients, and payment links attached to invoices. For large enterprises, there are also software that integrate with other business software such as CRM, ERP, e-commerce platforms, and payment gateways.

When purchasing through software resellers, the reseller will provide explanations, but service levels vary widely among resellers, so be careful. There are also training at implementation and paid services such as account code implementation, so it is good to ask vendors about these at implementation. Service may not be as detailed as in Japan, so ask questions clearly and precisely. Introductory training and support during setup are available from some vendors, so it's worth inquiring when implementing the software.

Japanese accounting software is not recommended as it does not meet UAE tax requirements.

Chapter 4: What About Audits in the UAE?

Audit Requirements

In principle, enterprises operating in the UAE are obligated to undergo audits of their financial statements by independent licensed audit firms. However, depending on the area where the company is located and the type of enterprise, audit report submissions may not be mandatory.

Whether audits are mandatory for Free Zone enterprises depends on the regulations of each Free Zone, but as a general trend, many Free Zones require annual audits of enterprises, and audited financial statements are required to be submitted within the deadline set by each authority. Some operators without a focus on domestic UAE business choose to establish companies in Free Zones such as Meydan or Dubai Silicon Oasis (DSO), which currently do not mandate audits.

However, even if not mandatory, conducting regular audits establishes corporate credibility and is prudent to prepare proper financial statements and undergo audits to comply with UAE's rapidly changing regulatory environment.

**Audit Procedures**

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

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

Chapter 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 on January 1, 2018. Enterprises collect VAT from customers and pay it to the government, but similarly can receive reimbursement from the government for taxes paid to suppliers, so in practice they pay the difference when filing. VAT Registration

VAT registration is mandatory when sales reach a certain threshold, regardless of whether the company is on the Mainland or in a Free Zone. Late registration currently results in a 10,000 AED fine.

• 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 mandatory 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.

VAT Tax Methods and Rates

UAE VAT tax rates are classified as follows: - Standard Rate: 5% - Zero Rate Items: 0% - Exempt Items: Exempted

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

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

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

Services provided to enterprises or 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 (①-②) is paid to the government. VAT Declaration

Upon completion of VAT registration, you receive a VAT registration certificate. Based on the filing period specified in that document, VAT declarations are made. The VAT period is generally every three months, with declarations made in the month following the declaration period.

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

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 your orders follow the same format. If these invoices are not accepted as supporting documents, it can lead to penalties or complications during VAT declarations or FTA audits. Additionally, VAT paid on purchased goods cannot be claimed as Input VAT in VAT declarations.

Required Content to Include:

• 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

Chapter 5: What is Corporate Tax (Corporate Tax) in the UAE?

Corporate Tax applies to fiscal years beginning from 2023 onwards. Here is a brief overview. Corporate Tax Registration

Corporate Tax registration is required within nine months of the end of the fiscal year beginning from 2023 onwards. For example, if a company's fiscal year is January to December, the fiscal year beginning in 2024 will end in December 2024, and Corporate Tax registration must be completed by the end of 2025. Corporate Tax Rates and Applicable Enterprises

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%. (However, the portion under AED 375,000 remains at 0%)

Corporate Tax for Free Zone enterprises is said to be 0%, but due to ambiguous announcements regarding 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 for the period after company formation, not for the target year). If 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 are expected from the government side regarding detailed Corporate Tax filings and tax-exempt business registration. We will update this separately.

Corporate Tax Declaration

Declarations must be filed within nine months of the 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 audit may generally be difficult.

Chapter 6: What is the 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.

The first year can be set for 6 to 18 months from the date of establishment, and from the second year onwards, it is one year from that fiscal year-end. In the UAE, the calendar year (January to December) is standard.

Example of Fiscal Year Setting Methods:

If the establishment date is March 16, 2023, examples of choices would be:

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

• March 16, 2023 to March 31, 2024: April to March. The standard fiscal year in Japan

• 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 March 31, 2024: April to March. 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 mainly consists of only VAT 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 is increasingly demanded, and regulatory changes are dynamic. To avoid penalties and fines, daily preparation is essential.

Accounting is the foundation of company management and an important part of growing the business. Biz Easy provides comprehensive support ranging from accounting and tax compliance advice to operational outsourcing. We strive to provide clear and thorough 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 / Get to Know Your Tax Obligations