Financial statements vs Audit under Corporate Tax – A clear guide 

United Arab Emirates (UAE) is globally known as one of the most preferred countries when it comes to favourable business environment. UAE offers a well-established infrastructure, a strong banking system, and business-centric regulations which makes it a great place for businesses. UAE comprises of seven emirates in total namely Dubai, Abu Dhabi, Sharjah, Fujairah, Ras Al-Khaimah, Umm Al-Quwain and Ajman which also have their own rules and regulations on emirates level. To understand the requirement of financial statements and audit in UAE, we must first understand the difference between Mainland and Freezone.  

In terms of setting up a new business, UAE offers primarily two geographical locations to the entrepreneurs and investors, one is Mainland and the other is Freezone.  

• Mainland vs Freezone 

What are Free zones? 

These are specified geographical areas within the UAE that have been established by the UAE government to encourage direct foreign investment into the UAE. There are number of relaxations in terms of taxes, duties, etc. for businesses set up in Freezones. Currently, there are over 40 freezones across UAE and each Freezone offers different privileges for different industries. Each Freezone has independent laws and regulations where most of the Freezones such as Dubai Multi Commodities Centre (DMCC), Dubai Silicon Oasis (DSO), etc. make it mandatory for the companies registered in such Freezone to get the financials audited but there are also few Freezones where the audit is not mandatory.  

What is Mainland?  

Mainland in the UAE are areas outside Freezones and falls under the jurisdiction of the Emirates' local governments. Companies established in the mainland are governed by Commercial Companies Federal Law 32 of 2021, which states that all companies operating in the mainland UAE must register themselves at the local competent authority in the relevant Emirate. The law further requires companies registered in UAE mainland to get their financial statements audited. Such companies are also required to keep their financial records for 5 years at least to comply with the requirements as per the law. 

Financial Statements under Corporate Tax  

Irrespective of the location of establishment i.e. whether Freezone or Mainland. The financials statements in UAE are prepared using International Financial Reporting Standards (IFRS). UAE introduced Corporate Tax law in December 2022 vide Decree 47 of 2022. This law has been made effective from 1st June 2023 and every Financial year of a taxable person which starts on or after 1st June 2023 will be subject to the Corporate Tax. 

After the introduction of Corporate tax, it was a matter of great concern for the businesses in UAE on whether separate financial statements would need to be prepared for Corporate Tax or Financial statements generally prepared using IFRS would be accepted for Corporate Tax purposes.  

Ministerial Decision 114 of 2023 was issued by the Government which clarified that Financials statements to be used for the purpose of Corporate tax would be the same which are prepared using IFRS. The decision provided a much-needed clarity. It clarified that businesses do not need to prepare dual financial statements, one for commercial law purposes and one for Tax law purposes.  

Keeping appropriate records and statements has become significant now after the Corporate Tax implementation. Not only Taxable persons but exempt persons (to be linked with another article on exempt persons) under Corporate Tax should also have sufficient records and statements to substantiate their claim of being exempt from Corporate Tax whenever required by the Tax authority.  

• Audit under Corporate Tax  

Preparing Financial statements and getting such statements audited are two different tasks. Financial statements are comprehensive reports that provide financial data of a company’s performance and its position whereas audit is an independent examination of Financial statements which ensures that the financial statements give a true and fair view of company’s performance. According to Article 2 of Ministerial Decision 82 of 2023, only the following Persons are required to maintain audited Financial Statements for the purpose of Corporate Tax: 

• A Taxable Person deriving Revenue exceeding AED 50,000,000 during the relevant Tax Period; and 

• A Qualifying Free Zone Person. (to be linked to QFZP article) 

Although preparing financial statements is crucial for every person for tax compliance purposes, audit is not mandatory for every person subject to Corporate Tax. The Government of UAE gave a big relief to the small business owners by issuing this decision. While a juridical person in the mainland was already required to get audited even before the Corporate Tax, this threshold of AED 50 million is a relief for natural persons earning revenue from business activities in UAE that are subject to Corporate Tax.  

For example, a natural person earning revenue of AED 45 million from business activities in UAE is subject to Corporate Tax but is not required to get its financial statements audited as the total revenue is less than the prescribed threshold of AED 50 million for audit under the Corporate tax. 

Conclusion 

In view of the above, we have summarized the requirement of preparing financial statements and getting audited for different categories of persons as per Corporate Tax law as below: