Clarification from the Federal Tax Authority regarding the first tax period

The Federal Tax Authority said today that the first tax period for a newly established company, a legal person subject to corporate tax, depends on the first fiscal year under the Commercial Companies Law.

The Authority added, in a clarification issued today to raise awareness of the first tax period for corporate tax for legal persons, that the Corporate Tax Law applies to tax periods starting on or after June 1, 2023, and the tax period for the taxable person is the fiscal year, or part thereof, for which a tax return must be submitted.

According to the general clarification, for newly established companies under the Commercial Companies Law, if the first fiscal year begins on or after June 1, 2023, this fiscal year shall be considered the first tax period for corporate tax purposes.

If the fiscal year, under the Commercial Companies Law, does not represent a period of 12 months, but ranges between 6 months and 18 months, the Federal Tax Authority accepts this period as the first tax period for corporate tax purposes.

However, if the first fiscal year begins before June 1, 2023, the first tax period is the subsequent 12-month fiscal year beginning on or after June 1, 2023, and each subsequent tax period is the 12-month period following the end of the first tax period.

The Authority indicated that the new general clarification aims to shed light on the first tax period for corporate tax purposes, in relation to a legal person, which is subject to tax, and is subject to the provisions of the Commercial Companies Law, and a non-resident person who is a legal person with a permanent establishment, and a resident legal person that is established, created or otherwise recognized under the legislation of another country, and which is effectively managed and controlled in the UAE.

The general clarification indicated that the tax period for which the taxable person must submit his tax return is the fiscal year or part thereof, according to the Corporate Tax Law, and the taxable person’s fiscal year is the calendar year or the twelve-month period for which the taxable person prepares his financial statements.

He added that with regard to legal persons, which were established, formed or created under the Commercial Companies Law, their first financial year does not necessarily have to be a period of twelve months, but it can be a period ranging from 6 months to 18 months, whereby the financial year followed by the taxable person is accepted, under the Commercial Companies Law, as the financial year, and therefore it will be the tax period for corporate tax purposes.

He explained that in such a case, the taxable person does not have to submit any request to the Authority to change his tax period, but rather the tax period is calculated based on the information provided when registering for corporate tax purposes, unlike other cases in which the taxable person must submit a request to the Authority to change his tax period.

He pointed out that if the first tax period is longer or shorter than the twelve-month period, there is no pro rata allocation of the various limits stipulated under the Corporate Tax Law, such as the revenue limit for small business facilities. The only exception is the minimum limit for the purposes of the general rule for interest deduction restrictions (currently set at AED 12 million).

According to the general clarification, for a non-resident person who has a permanent establishment in the country, his first tax period is the fiscal year or part thereof starting from the time when the permanent establishment first commenced its activity.

If such activities commence before 1 June 2023, the first tax period shall be the first financial year beginning on or after 1 June 2023. However, where such activities commence on or after 1 June 2023, the first tax period shall be from the time the non-resident’s activities commence (i.e. from the time his activities commence), until the end of the non-resident’s financial year, provided that the tax period shall not be less than 6 months and not more than 18 months.

He stated that if a legal person is established, created or otherwise recognised under the legislation of another country or foreign territory, but is considered a resident person on the basis that it is effectively managed and controlled in the country, the first tax period shall be the fiscal year, or part thereof, which begins on or after June 1, 2023.

The general clarification indicated that if a company ceases to conduct business or business activity, whether as a result of dissolution or liquidation, or for any other reasons, during the first tax period, the taxable person must submit a request to cancel the tax registration.

The taxable person’s cessation of business or business activities during his first tax period does not affect his obligation to register for corporate tax, i.e. the taxable person must still register for corporate tax even if he ceases to conduct business after the start of the first tax period.

In these cases, the taxable person must still submit an application for tax deregistration within a period not exceeding 3 months from the occurrence of the event that results in deregistration.