Corporate Tax Public Clarification on First Tax Period of Juridical Person

The Federal Tax Authority (FTA) in the United Arab Emirates (UAE) has issued a public clarification regarding the First Tax Period of a Juridical Person under the Federal Decree Law No. 47 of 2022 (UAE CT Law).?

As per UAE CT Law, the Tax Period of a Taxable Person is the ‘Financial Year or part thereof’ for which a tax return is required to be filed. The ‘Financial Year’ (FY) is the Gregorian calendar year, or the 12-month period for which the Taxable Person prepares financial statements.?

The first FY of a Juridical Person may not necessarily be a 12-month period. Under the Commercial Companies Laws in the UAE, the first Financial Year could be a period between 6 to 18 months.? The UAE CT Law was silent on such situations where the FY of a Juridical Person was different than a 12-month period.?

This ambiguity have now been addressed in the clarification with practical examples as summarized below:?

A. First Tax Period for newly incorporated, formed or established entity?

• A Taxable Person can make an application to the Federal Tax Authority (FTA) to change the start and end date of its Tax Period, or use a different Tax Period, subject to certain conditions, provided that the Tax Period is not extended to more than 18 months, nor reduced to less than 6 months.?
• Incase of a newly incorporated company, where the first Tax Period of Taxable Person is not a 12-month period but a period between 6 months and 18 months, the Taxable Person is not required to make any application to the FTA to change its Tax Period.?

?Below are few illustrations for reference:?

• Where the first Tax Period is longer or shorter than a 12-month period, there is no pro-rating of the various thresholds prescribed under the Corporate Tax Law, some of the examples are:

1. Taxable income threshold of AED 3,75,000
2. Revenue threshold of AED 3 million
3. Requirement to prepare and maintain audited financial statements for the Tax Period where the Revenue for such Tax Period exceeds AED 50 million

An exception is the de minimis threshold for the applicability of General Interest Deduction Limitation Rule i.e. AED 12 million shall be adjusted in proportion to the length of the Tax Period.

B. First Tax Period for Resident Person with effective management and control in the UAE

• Where a juridical person is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction, but is a Resident Person by virtue of being effectively managed and controlled in the UAE, the first Tax Period will be the Financial Year or part thereof, commencing on or after 1 June 2023.

C. First Tax Period for Non-resident Person with a Permanent Establishment (PE)

D. Tax De-registration where the Person ceases their Business or Business Activities before or during the first Tax Period

• In the event of the cessation of Business or Business Activity, whether by dissolution, liquidation or otherwise, a Taxable Person has to deregister from Corporate Tax.
• Even if there is cessation of business during the first tax period, it does not impact the obligation to register for Corporate Tax i.e. a Taxable Person is still required to register for Corporate Tax even where there is a cessation of its Business or Business Activities during its first Tax Period.
• It has been clarified that the expiry of license or lack of valid license does not itself constitute cessation of Business or Business Activity.
• Where a Taxable Person ceases their business during their first Tax Period, their first Tax Period will come to an end on the cessation date. Such a person should de-register within 3 months from the cessation date.
• Failure to adhere to the timelines for Tax Deregistration will attract an administrative penalty of AED 1,000 and on the same date monthly, up to a maximum of AED 10,000.

In conclusion, this is a welcome step from the FTA to clarify such an important aspect which will assist the tax payers to accurately determine their first tax period and calculate tax liabilities for the said period. The Emara Tax Portal is open for all Taxable persons for CT registration and tax deregistration.?