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

A common challenge for businesses is determining the commencement of their first tax period

By Prateek Tosniwal

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Published: Mon 2 Sep 2024, 6:57 PM

Last updated: Mon 2 Sep 2024, 6:58 PM

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.

Prateek Tosniwal, Partner, MI Capital Services

The corporate tax lawalso provides guidance for non-resident persons operating in the UAE through a permanent establishment or dependent agent. For non-residents with a fixed place of business, the first tax period begins only after the entity has been operational for six months. For instance, a company that began operations on February 1, 2022, (having financial year ranging from January to December) and continued past June 1, 2023, would have its first tax period starting with the financial year beginning after December 1, 2023 (i.e. establishing permanent establishment in six months) i.e. effectively January 2024 to December 2024. Non-residents operating through a dependent agent will have their tax period commence immediately after June 1, 2023. For example, a non-resident being an agent with effect from March 1, 2023, would see their first tax period begin on March 1, 2024.

Additionally, juridical persons incorporated under foreign jurisdiction but effectively managed and controlled in the UAE are considered resident persons under the corporate tax law. A company incorporated outside the UAE with a financial year from January 1 to December 31, would have its first tax period from January 1, 2024, provided it is managed and controlled in the UAE during this time. Similarly, a foreign company with a financial year running from September 1 to August 31 would see its first tax period start on September 1, 2023, if it is managed and controlled in the UAE during this period.

Regarding deregistration, businesses are required to deregister for corporate tax if they cease operations due to dissolution, liquidation, or any other reason. However, the expiration of a business license alone is not sufficient for deregistration. Even if a company winds down its operations during its first tax period, it must still register for corporate tax in accordance with the law.

The key takeaway from the public clarification is breaking the myth that taxes are only due from January 1, 2024. This isn’t the case for entities whose first tax period spans from June to December 2023. Additionally, the first tax return is due by September 30, 2024, setting the precedent for future filings. Embrace the change, adapt to the new requirements, and ensure your organisation is prepared to thrive in the evolving corporate tax landscape.

The writer is Partner - MICS International.