FTA Issues Guidance On First Corporate Tax Period For Juridical Persons

The Federal Tax Authority (FTA) has clarified that the initial Tax Period for a newly established company, subject to Corporate Tax, aligns with its first Financial Year as per the Commercial Companies Law. This applies to Tax Periods starting on or after 1st June 2023. The Financial Year or part thereof for which a Tax Return is required constitutes the Tax Period.

For companies formed under the Commercial Companies Law, if their first Financial Year starts on or after 1st June 2023, this period is considered the initial Tax Period for Corporate Tax purposes. If this Financial Year spans between 6 and 18 months instead of the standard 12 months, it will still be accepted as the first Tax Period by the FTA.

If a company's first Financial Year begins before 1st June 2023, then the initial Tax Period will be the subsequent 12-month Financial Year starting on or after this date. Each following Tax Period will be the 12 months succeeding the end of this initial period.

The Public Clarification also addresses scenarios where businesses cease operations before or during their first Tax Period. If a company dissolves, liquidates, or otherwise ceases its activities during this time, it must apply for Tax Deregistration within three months from the cessation event. This requirement remains even if business activities stop after the start of the first Tax Period.

Non-Resident Persons with Permanent Establishments

For Non-Resident Persons with Permanent Establishments in the UAE, their first Tax Period begins from when these establishments start operations. If these activities commenced before 1st June 2023, their first Financial Year starting on or after this date will be considered their initial Tax Period. For activities beginning on or after 1st June 2023, the period from commencement until the end of their Financial Year will be recognised as their first Tax Period, provided it spans between six and eighteen months.

Financial Year and Corporate Tax Obligations

The FTA's Public Clarification specifies that a company's Financial Year can follow either the Gregorian calendar year or any other twelve-month period used for preparing financial statements. This period is crucial for determining when a company needs to file its Corporate Tax Return.

In cases where a company's first Financial Year does not align with a standard twelve-month period but ranges between six and eighteen months, this duration will still be accepted as its initial Tax Period without requiring an application to change it. This differs from other situations where companies must apply to alter their tax periods.

Thresholds and Exceptions

The Public Clarification notes that if a company's first Tax Period is shorter or longer than twelve months, there is no pro-rating of thresholds under Corporate Tax Law except for the de minimis threshold related to General Interest Deduction Limitation Rule, currently set at AED12 million.

For Resident Persons effectively managed and controlled in the UAE but incorporated under foreign legislation, their first Tax Period starts from any Financial Year commencing on or after 1st June 2023. This ensures consistency in applying Corporate Tax regulations across different types of juridical persons operating within UAE jurisdiction.

The FTA's recent Public Clarification aims to enhance understanding regarding these provisions and ensure compliance among newly established companies and other taxable entities within UAE's corporate tax framework.

With inputs from WAM