Financial Year in UAE: Definition, Compliance, and Tax Implications

Key Takeaways:

• The financial year in UAE is typically the Gregorian calendar year (1 Jan – 31 Dec) or a 12-month period for which a company prepares financial statements
• Companies can choose alternative financial year periods during incorporation, subject to Commercial Companies Law requirements
• The chosen financial year directly impacts corporate tax filing deadlines and compliance obligations

What Is the Financial Year in UAE?

The financial year in UAE is the 12-month period used by businesses to prepare their financial statements and calculate tax obligations. Under UAE law, companies can follow either the Gregorian calendar year (1 January to 31 December) or choose an alternative 12-month period that aligns with their business operations.

For companies subject to the Commercial Companies Law, the financial year serves as the foundation for corporate tax calculations, VAT reporting, and regulatory compliance. The chosen financial year becomes the “tax period” for corporate tax purposes under UAE Corporate Tax Law.

Standard Financial Year Periods and Alternatives

UAE businesses have flexibility in choosing their financial year, with the following options commonly used:

Understanding UAE Corporate Tax Returns First Filings & Compliance

For businesses in the UAE, the process of UAE corporate tax returns first filings is a critical step. The United Arab Emirates (UAE) Corporate Tax Law has introduced a new era of taxation for businesses operating within the country. A crucial aspect of this law is the concept of the first tax period, which is directly linked to your company’s chosen financial year. This period serves as the foundation for future tax calculations and compliance obligations.

The tax return under Corporate Tax law is required to be filed within 9 months from the end of the tax period. Thus, the first tax return under Corporate tax law is required to be complied within 9 months from the end of the first tax period applicable to the taxable persons.

Corporate Tax Law applies to Tax Periods commencing on or after 1 June 2023. It is significant for one to understand the meaning of Tax Period & Financial year to understand the concept of First Tax Period.

Meaning of Tax Period: Tax Period is the Financial Year or part thereof for which a Tax Return is required to be filed.

Meaning of Financial Year: The Financial Year of a Taxable Person shall be the Gregorian calendar year, or the 12-month period for which the Taxable Person prepares financial statements.

As the term tax period is vague, public clarification was issued on 30th July 2024 on the first tax period applicable for a taxable person. Through this clarification, the first tax period of the following taxable persons was explained:

How to Select or Change Your Company’s Financial Year

Selecting the right financial year is crucial for your business operations and compliance. Here’s a step-by-step guide:

During Company Incorporation:

• Specify your preferred financial year in the Memorandum of Association
• Ensure the first financial year is between 6-18 months as per Commercial Companies Law
• Consider alignment with parent company or major markets

Changing Financial Year After Incorporation:

• Board resolution approving the change
• Amendment to Memorandum of Association
• Notification to relevant authorities (DED, FTA)
• Update with banks and other stakeholders

Financial Year and Corporate Tax Compliance in UAE

Your chosen financial year directly impacts your corporate tax obligations:

• Tax Return Filing: Due within 9 months of financial year-end
• Tax Payment: Due with the tax return filing
• Financial Statements: Must be prepared for each financial year
• Record Keeping: Maintain records for each financial year period

For management consultants, IT companies, and trading firms, aligning your financial year with your business cycle can optimize cash flow and compliance timing.

Detailed Analysis: 

Resident juridical person subject to Commercial Companies Law

1. As per Commercial Companies Law, the first Financial Year of a newly incorporated company starting from its date of incorporation must be not less than 6 months and not more than 18 months.
2. The subsequent Financial Years shall consist of consecutive periods, each of 12 months commencing directly upon the expiry of the preceding Financial Year.
3. The company shall prepare Financial statements for each Financial Year.
4. The Tax Period depends on the Financial Year for which the Taxable Person prepares financial statements unless a different basis has been approved by the FTA.
5. The first Tax Period of a newly incorporated company will depend on the first financial year under the Commercial Companies Law.
6. Three scenarios that can arise for a newly incorporated company, are mentioned below:

• First financial year is a period of 12 months
• First financial year is a period between 6 to 12 months
• First financial year is a period between 12 to 18 months

Where the first Financial Year commences before 1 June 2023, the first Tax Period will be the subsequent 12-month Financial Year commencing on or after 1 June 2023.

First Tax period in the case of business incorporated prior to 1st June 2023 is illustrated in the below table:

First Tax period in the case of business incorporated on or after 1st June 2023 is illustrated in the below table:

• A pro rata approach should not be applied to the following thresholds where the first Tax Period of the Taxable person is more or less than 12 month:
  • Threshold limit of AED 375000 for applicability of Corporate Tax Law
  • In calculation of Threshold limit for Small Business Relief
  • In calculation of threshold limit for applicability of audited financial statements.
  • In calculation of threshold limit for preparation of financial statements using cash basis of accounting.
  • In calculation of threshold limit for preparation of financial statements using IFRS for SMEs.
  • Requirement to prepare master file and local file in case of constituent entity of multinational enterprise.
  • De-minimis Requirement thresholds.
  • Pro-rating of the threshold is applicable where the relevant Tax Period of a Taxable Person is more or less than 12 months, the de-minimis limit for applicability of General Interest Deduction Limitation Rule (i.e. AED 12 million) shall be adjusted in proportion to the length of the Tax Period.

Financial Year and VAT Compliance

While VAT returns are filed quarterly regardless of your financial year, the chosen financial year affects:

• Annual VAT reconciliation: Must align with financial statements
• Audit requirements: VAT audits typically follow the financial year
• Record keeping: VAT records organized by financial year periods

Financial Year for Mainland vs Free Zone Companies

Both mainland and free zone companies follow the same financial year principles, but there are some considerations:

• Mainland Companies: Must comply with Commercial Companies Law requirements
• Free Zone Companies: May have additional free zone authority requirements
• Both: Subject to UAE Corporate Tax Law from June 1, 2023

A detailed analysis on the first tax period for Non-Resident Person who is a juridical person having a Permanent Establishment & Resident Person that is incorporated in a foreign jurisdiction that is effectively managed and controlled in the UAE would be discussed in the next blog.

Frequently Asked Questions About Financial Year in UAE

What is the tax period in the UAE?

The tax period in UAE is the financial year or part thereof for which a tax return is required to be filed. It typically aligns with your company’s chosen financial year and serves as the basis for corporate tax calculations.

What is the current financial year in the UAE?

For most companies following the calendar year, the current financial year runs from 1 January 2025 to 31 December 2025. However, companies can choose alternative 12-month periods based on their business needs.

Can a company choose a different financial year in the UAE?

Yes, companies can choose alternative financial year periods during incorporation or change them later through proper legal procedures. The choice must be specified in the Memorandum of Association and may require FTA approval for tax purposes.

How does the financial year affect corporate tax and VAT deadlines?

Your financial year determines when corporate tax returns are due (within 9 months of year-end) and affects the timing of annual financial statement preparation. VAT returns remain quarterly regardless of your financial year choice.

Part – 1 Conclusion:

Understanding the concept of first tax period and financial year selection can be challenging. It is highly recommended to seek professional advice from tax experts or accountants who are familiar with the local tax regulations. We at BCL Globiz, can provide valuable guidance on:

• Determining the appropriate tax period.
• Calculating taxable income and tax liabilities.
• Ensuring compliance with tax regulations.
• Addressing any tax-related queries or concerns.

 By following the concept of the first tax period and complying with the associated obligations, businesses in the UAE can establish a solid foundation for their tax affairs and minimize potential risks.

Also read: Penalties Under UAE Corporate Tax Law

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