The countdown begins: Are you ready for your first tax period?

Why is there so much panic in the market? There’s still an entire year before most tax returns are due, giving us ample time to finalise tax positions in the books. Remember, taxes only become applicable from January 1, 2024; June 1, 2023, was merely the date the tax was announced.

We hear these concerns repeatedly from businesses of all sizes. While some are valid, many are based on misconceptions. The goal of this article is to clarify what your first tax period will be and how to prepare effectively.

Undoubtedly the implementation of the UAE corporate tax law, effective from June 1, 2023, has brought about significant changes for businesses in the Emirates. The Federal Tax Authority (FTA) time and again provides clarity on the much-sought matters, this time has covered first tax period, helping businesses align their tax obligations with their financial years.

Under the UAE corporate tax law, a taxable person’s ‘tax period’ refers to the financial year or part of the year for which a tax return must be submitted. Businesses have the flexibility to align their financial year either with the Gregorian calendar year (January to December) or choose a custom 12-month period, depending on their financial reporting practices. Companies subject to this law include entities incorporated under the UAE Commercial Companies Law (mainland companies, free zones, trusts and civil), as well as foreign entities operating in the UAE through branches or headquarters.

A common challenge for businesses is determining the commencement of their first tax period. For most, this period begins with the first financial year starting on or after June 1, 2023 i.e. typically January 1, 2024. Newly incorporated companies, however, may face added complexity as their first financial year could range between six and 18 months.

For example, a company established on February 1, 2023, with a financial year following the Gregorian calendar, would have an initial financial period from February 1 to December 31, 2023. However, its first tax period would only commence on January 1, 2024 i.e. the first financial year starting after June 1, 2023. Meanwhile, a company incorporated on June 2, 2023, with a financial year from January to December, would see its first tax period run from June 2 to December 31, 2023, with a tax return due by September 30, 2024. This breaks the myth that the first tax return will only be due by September 30, 2025.

Importantly, the flexibility in financial years does not alter corporate tax obligations, even if a company’s first tax period is shorter or longer than 12 months. The key threshold of Dh375,000 in income for the zero per cent corporate tax rate remains unchanged, as does the small business relief limit of Dh3 million in revenue. Companies with revenues exceeding Dh50 million must still provide audited financial statements. An exception exists for the general interest deduction limitation rule, where the deductible interest expense threshold is adjusted proportionately if a company’s tax period is shorter or longer than 12 months.

The writer is Partner - MICS International.