What is UAE Accounting & Tax obligation? – Overview of UAE Accounting & Tax and how to proceed –
Accounting is fundamental to business operations. Accounting plays a very important part in business, including business metrics, compliance such as paying taxes, and presenting financial statements to stakeholders.
Different countries have different accounting systems, and in the UAE, accounting transparency is required more and more each year, and as the country grows rapidly, it is important to keep abreast of the dynamic changes in systems and procedures. In this article, we will provide an overview of accounting in the UAE.
After reading this article…
- Get a complete picture of the accounting to be done in the UAE
- Get an overview of the tax system in the UAE
- Understand the path of how to proceed with accounting in the UAE
Chapter 1: UAE Accounting Overview
The United Arab Emirates is a federation of seven emirates with a diverse economic portfolio ranging from oil exports to tourism, trade, real estate to financial services.
The most widely used accounting standard in the UAE is IFRS (International Financial Reporting Standards), and financial statements that do not comply with IFRS are not considered correct by stakeholders and may not be accepted by banks or governments. In the UAE, VAT is a tax that is charged on the consumption or use of goods and services.
In the UAE, VAT (Value Added Tax) was introduced in 2018 and corporate income tax in June 2023, and is regulated by the FTA (Federal Tax Authority). Companies or individuals that meet certain requirements must register for VAT and corporate income tax with the FTA according to the rules, and file and pay their taxes regularly. Failure to register on time or to file returns is subject to fines and other penalties. Currently, the UAE does not impose regular payment of social insurance premiums for employees or taxation of personal income.
Generally, accounting software that complies with the UAE tax system, such as VAT, should be used for bookkeeping. We are often asked if it is possible to use Japanese cloud accounting software as a substitute, but basically we recommend using software with functions that are in line with local accounting. Cloud and subscriber software is widely used in the UAE.
Although an accounting audit may not be mandatory depending on the type of company and where it is established, it is recommended to have it done as it may be required at short notice depending on the situation.
Let’s take a look at them one by one.
Chapter 2: What is Bookkeeping in the UAE?
What is the IFRS accounting standard?
In the UAE, accounting is generally performed in accordance with International Financial Reporting Standards (IFRS). IFRS is an accounting standard established by the International Accounting Standards Board (IASB) and is understood and accepted by companies and investors internationally.
IFRS has many similarities to Japanese accounting standards and is easy to become familiar with. However, while Japanese accounting has detailed rules, IFRS has a strong aspect of presenting a principles-based framework that focuses on the substance of transactions and events, for example, determining the depreciation period of an asset based on one’s own judgment, In the UAE, financial statements that do not conform to IFRS may be rejected by auditors during an audit.
Typical financial statements under IFRS：
- Balance sheet
- Income statement
- Statements of cash flows
- Statement of Shareholders’ Equity
Do we have to keep the books?
The UAE Companies Law requires all companies in the UAE to keep accounting records for five years from the end of the financial year, and all joint stock or limited liability companies are required to appoint one or more auditors to conduct an annual audit, while all other types of companies are required by law to appoint an auditor. Companies must use international accounting standards and prepare annual financial statements, including balance sheets and profit and loss accounts, that accurately show the company’s profit and loss.
In addition, the standard articles of incorporation of Dubai Mainland companies require that companies prepare a balance sheet and profit and loss statement, an annual report on business activities and their financial condition, and submit a profit distribution proposal to shareholders for their approval, and the balance sheet and profit and loss statement must be submitted to shareholders for their approval. Actual dividends, if any, should be calculated and paid based on this annual report.
In reality, free zones that have special regulations and preferential treatment to attract foreign investors operate with a certain degree of autonomy under their own regulations, and accounting bookkeeping is generally required in all free zones, even if the submission of accounting and auditing documents is not necessarily mandatory.
In doing business, accurate bookkeeping is essential for compliance with VAT and other tax regulations, for financial transparency, and for proper assessment of business conditions. If you do not keep track of your financial situation, you may not realize that you have reached the VAT requirement, which may result in delays in registration, or you may be required by the government or banks to suddenly submit audits or financial records in the course of business, or the UAE system may change, and many other situations can be anticipated. It is important to be prepared to respond promptly when the need arises. There is a risk of fines and legal action against companies that do not maintain proper financial records.
[Examples of where financial statements are required:
- In some areas, the financial statements are required to be submitted when a company license is renewed (in some free zones, etc.).
- Determination of registration requirements for VAT and corporate income tax
- Bank borrowing
- Liquidation of a company
- Requests from shareholders to submit financial statements
How do you manage invoices and receipt vouchers?
Maintaining supporting documents for accounting purposes is extremely important, especially in the UAE where regulatory compliance is a high priority. It is important to keep track of them on a regular basis, as they must be submitted promptly when requested by government authorities.
The retention period for accounting records is mandated by the 2015 Federal Law on Commercial Companies (2), which requires companies to keep accounting records for a minimum of 5 years. *There are exceptions such as 10 years for machinery and other assets and 15 years for real estate.
[Types of documents to be kept:
- Purchase and sales invoices
- Bank statements
- Receipts: All expenses, both operating and capital
- Contracts and agreements: lease agreements, supplier agreements, service agreements, etc.
- Payroll records: including pay stubs, bonuses, and other employee-related expenses
- Import/export documents
- VAT records: If you are VAT registered, all VAT related documents such as tax invoices, tax credit notes, tax returns, and other related documents.
Basically, digital data is acceptable.
It is also important to follow the format of invoices and credit notes for VAT returns in accordance with the regulations.
Credit Note: A document issued to reduce the invoice amount due to returned goods or incorrect invoices.
Chapter 3: What accounting software is available in the UAE?
With the introduction of VAT in 2018, accounting software capable of processing VAT calculations, declarations, and notifications is in common use. There is also software approved by the FTA (Federal Tax Authority).
Examples of accounting software are:
・QuickBooks * this is not registered, but this software is also famous.
Cloud-based software, where the amount of subscriptions varies depending on the number of available accounts and services, is often used, and can be used from a relatively low budget. It is best to choose a service based on the size of your company and the nature of your business.
Ease of use is also important. Many services offer a trial period, so make sure that the software is intuitive and easy to use. Many services offer various functions such as customizing invoice format, sending invoices directly to customers, and attaching payment links to invoices. For larger companies, some software offers integration with other business software such as CRM, ERP, e-commerce platforms, and payment gateways.
If you purchase through a software distributor, they will be able to explain the software to you, but be aware that the level of service offered by distributors varies widely. There are also services such as training and, for a fee, account introduction on your behalf, so it is a good idea to ask the vendor when introducing the software. It is advisable to ask the vendor about these services when you purchase the software.
Japanese accounting software is not recommended because it is not in line with the UAE tax system.
Chapter 4: What about UAE Audits?
As a general rule, companies operating in the UAE are required to have their financial statements audited by an independent, licensed auditing firm. However, depending on the area to which the company belongs and the type of company, an audit report may not be required.
Whether or not an audit is mandatory for free zone companies depends on the regulations of each free zone, but as a general trend, many free zones require companies to have an annual audit and may require audited financial statements within the timeframe specified by the respective authorities. Businesses that are not primarily focused on doing business in the UAE may set up in free zones that do not currently require audits, such as the Meydan Free Zone (Meydan) and Dubai Silicon Oasis (DSO).
However, even though it is not mandatory, it is wise to have proper financial statements prepared and audited in order to establish the credibility of the company by conducting regular audits and to comply with the rapidly changing regulations in the UAE.
The auditor is usually hired by a third-party organization that has no vested interest in the company. Financial statements (trial balance, etc.) and bank statements issued from accounting software are submitted to the auditor.
As required by the auditor, additional documents and explanations of their contents are provided, and finally the auditor compiles them into an Audit report. In the case of small local audit organizations, the report may only be prepared in Arabic, so check in advance.
Chapter 5: What is the UAE VAT?
VAT is like the consumption tax in Japan, an indirect tax imposed on the consumption or use of most goods and services, except for some specific goods and services, and was introduced in the UAE on January 1, 2018. Companies pay the VAT collected from their customers to the government, but can receive a refund from the government for taxes paid to suppliers as well, so they actually pay the difference to the government when they file their tax returns.
VAT registration is mandatory once certain sales requirements are reached, regardless of whether the company is based in the mainland or free zone. Fines are imposed for late registration.
Voluntary registration: A company can opt to register for VAT if sales exceed AED 187,500 in the last 12 months or expect to exceed the above voluntary thresholds within the next 30 days.
Mandatory registration: A company is required to register for VAT if its sales reach 375,000 AED in the past 12 months or expect to exceed the above mandatory criteria within the next 30 days.
VAT rates in the UAE are categorized as follows
- Standard rate: 5%.
- Zero-rated goods: 0%.
- Tax-exempt items: N/A
The standard tax rate is based on the place of consumption of the service or product. Basically, goods and services consumed in the UAE
Basically, goods and services consumed in the UAE must be taxed at 5%.
Zero-rated goods are services that are shipped to or used outside the country and include passenger and international transportation-related services, educational services, and healthcare services.
Tax-free goods include life insurance, housing and buildings, land, and local passenger transport.
Services provided to companies and persons resident in the UAE are taxed at 5%. Services provided to companies and persons resident in Japan are taxed at 0%.
Calculation of VAT
VAT charged to customers for goods/services provided… (1)
VAT paid on purchases and expenses: ②.
The difference between ① and ② is paid to the government.
Upon completion of VAT registration, you will receive a VAT registration certificate. The VAT period is generally every three months, and the VAT return is filed in the month following the reporting period.
Even if the tax payment is 0 AED, a declaration to that effect is required. Large fines and penalties may be imposed for late or incomplete tax declarations, as well as for errors in tax returns.
If the amount of VAT refunded is greater than the amount of VAT owed, the company may request a VAT refund. However, the approval of the refund is subject to strict inspection by the FTA.
VAT invoices (tax invoices)
In the UAE, VAT registered businesses must issue a tax invoice in a specific format prescribed by the FTA. Conversely, businesses that are not registered for VAT are not allowed to prepare a tax invoice.
Tax invoices are very important because they provide evidence of the supply of goods or services and the VAT charged on these supplies. Conversely, supplier invoices received in response to orders should also be carefully followed in a similar format. If these invoices are not accepted as vouchers, this can lead to penalties and complications when filing VAT returns or when audited by the FTA. VAT on the items purchased cannot also be claimed as input VAT in the VAT return.
The following information should be included in the invoices:
- The title “TAX INVOICE
- Supplier’s name, address, and TRN
- Recipient’s name, address, and TRN: If the recipient is a VAT registrant, also include his/her name, address, and TRN.
- Invoice number
- Issue date of the tax invoice
- Description of goods or services
- Unit price, quantity and tax rate
- Amount of discount
- Total amount paid including VAT (AED)
- Amount of tax at AED
Chapter 6: What is Corporate TAX in the UAE?
The CIT is subject to corporate taxation for fiscal years beginning after June 2023. Here is a brief overview.
Corporate Tax Registration
Corporate tax registration is required within 9 months of the end of any fiscal year beginning on or after June 2023.
For example, if a company’s fiscal year is from January to December 2024, the fiscal year is from January to December 2024, and the company must register for corporate income tax by the end of September 2025.
Corporate income tax rates and eligible companies, etc
The tax rates are as follows
- 0% for net profit before tax less than AED 375,000
- 9% for net profit before tax of more than AED 375,000
The corporate income tax rate for free zone companies was said to be 0%, but due to the ambiguity of the announcement regarding the treatment of sales from abroad, it is possible that they are subject to corporate income tax. It is possible to be exempt from corporate income tax in the case of appropriate activity or appropriate free zones. Otherwise, accounting audit documents are required (not for the year covered by such documents, but for the period after the establishment of the company). If you are filing a corporate tax return, you are not required to provide accounting audit documentation, but you are required to provide a profit and loss statement, balance sheet, and corporate tax statement documentation that can be attached to a solid corporate tax return. Updates from the government side are expected from time to time on detailed corporate tax returns and tax-exempt business registration. We will update this area separately.
Filing of corporate tax returns
Tax returns must be filed within 9 months of the end of the fiscal year. The method of filing is for the accountant to prepare the corporate tax calculation documents separately from the accounting audit documents, and submit those documents. Basically, it is generally difficult to find an accountant who will do the corporate tax return without auditing the accounts.
Chapter 7: What is the UAE Fiscal Year?
In the UAE, the rules of the Articles of Incorporation, which are based on the Companies Law, determine the fiscal year. 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. Normally, Mainland company shall mention its fiscal year on the MOA before signature. If any freezone, you can decide when the renewal time.
Example of how to set up a fiscal year:
If the date of incorporation is March 16, 2023, the following candidates are available as example selections.
- March 16, 2023 – December 31, 2023: January – December. Typical fiscal year in the UAE
- March 16, 2023 – September 30, 2023: October – September. The first year is based on the date of establishment, with the shortest possible period of 6 months.
- March 16, 2023 – August 30, 2024: September – August. The first year is set for a maximum of 18 months, based on the date of establishment.
Summary of UAE Accounting
We have looked at accounting in the UAE, and although the UAE’s taxation system is mainly limited to VAT and corporate tax, financial documents are required in many situations, such as the need for an accounting audit to renew a company license.
In addition, the UAE has become very demanding in terms of financial transparency as the country grows and the tax system changes, and the regulatory changes are dynamic. It is important to be prepared on a daily basis to avoid penalties and fines.
Accounting is a fundamental part of company management and an important part of growing your business, and Biz Easy offers a full range of support services, from accounting and tax compliance advice to practical representation. We will provide you with detailed and easy-to-understand explanations, and support your business by handling complicated tasks on your behalf so that you can focus more on your business.
If you are interested in our services, please feel free to contact us.