Having a business in any jurisdiction requires not only paying taxes properly but also reporting its activities. There is an inextricable connection between controlling tax calculations accurately and complying with other rules and regulations pertaining to business law.
The taxation of legal entities in the United Arab Emirates is minimal and is mostly associated with the fulfillment of indirect tax obligations. Consequently, it would be reasonable to expect that businesses in the state would also have to report less. Hence, we would like to examine whether this is true or not.
Audit and Accounting in the UAE
As a general rule, any legal entity doing business within the country must keep financial/accounting records and must also carry out the procedure of obtaining an annual audit report. This report contains all information about income and expenses. At the same time, the auditor's report can be submitted in Arabic or English.
Surely business owners in the UAE may have a lot of confusion and questions in their minds in this area. How so? Many of them have already heard that a financial audit is not always required for companies registered in the UAE. Are audits required in the UAE? Does a book audit need to be done annually? Is it necessary to submit financial statements to any authority? And so on.
According to article 27, paragraph 2 of the current Federal Law No. 2 of 2015 on UAE Commercial Companies, each company must appoint auditors to inspect its books by a licensed auditor registered with the UAE Ministry of Economy. All UAE companies are required to keep books, conduct an annual audit, and keep these records for five years. Financial records must be available to auditors during audits.
Although, as we know, the Commercial Companies Act is mandatory for all local companies registered on the mainland. The requirement for such companies to conduct an audit is therefore enshrined in the legislation.
In terms of free zones, the UAE requires all companies to keep financial records for at least five years. DMCC, among many others, duplicates this requirement in its regulations. The 2016 JAFZA Implementation Rules require free zone companies (FZCOs) and free zone businesses (FZEs) to maintain financial records for six years.
Furthermore, some free zone authorities require the submission of certified financial statements by companies wishing to renew their trading licenses. Dubai Multi Commodity Center (DMCC), Dubai Airport Free Zone (DAFZA), Dubai World Central (DWC), Jebel Ali Free Zone (JAFZA), Dubai International Financial Center (DIFC), Dubai Silicon Oasis (DSO), Creative City - Fujairah are some of these free zones. Dubai Free Zones typically offer their clients a wide range of tax and audit consulting firms.
Tax Reporting
Filling out a VAT return
VAT-registered businesses and taxpayers must file a VAT return with the Federal Tax Administration (FTA) at the end of each tax period.
The VAT return contains a summary of the value of supplies and purchases made by the taxpayer during the tax period. It also contains a summary of the amount of VAT the taxpayer must pay.
VAT returns are filed regularly through the Federal Tax Authority's electronic portal: eservices.tax.gov.ae within 28 days after the end of the tax period for each type of business. The standard tax period is:
- Quarter for businesses with a turnover of up to 150 million AED
- A month for businesses with an annual turnover of 150 million AED or more.
It is worth noting that the UAE Federal Tax Authority may periodically conduct a tax audit of a legal entity doing business in the country. This is in accordance with the provisions of the tax law.
Audits of this kind are conducted after prior notification of the legal entity - the audit object - at the place of business or accounting. For proper verification of accounting records, the tax auditor has the right to close the place to be audited (e.g. warehouse or store) for up to 72 hours.
The filing of an excise tax return
An excise tax return consolidates all fees paid by a taxpayer during a tax period. Excise tax returns must be filed online using the FTA portal - returns cannot be submitted otherwise. Forms are available in both English and Arabic. The tax period for excise tax returns is one calendar month. The deadline for filing tax returns is fifteen days after the end of the tax period.
When excise goods are imported into the UAE, the importer must submit an import declaration on the FTA website. The declaration will contain detailed information about the goods being imported.
The declaration automatically calculates the tax liability on imported goods using the standard price list published by the FTA. Whenever an excisable good's price does not appear on the FTA list, the importer is responsible for calculating the outstanding tax due based on the retail sale price.
It is always advisable to file excise tax returns on time, even if the excise tax has already been paid. If your excise tax declarations are late or if they are entirely missed, you will be fined by the FTA.
All companies registered in the UAE, including companies in free zones, are subject to beneficial owner registration procedures. This rule reflects the government's aim to promote the development of the business environment by bringing local regulations in line with international standards. It also establishes minimum requirements for the registration authorities to identify the beneficial owners of the business.
In accordance with Cabinet Resolution No. 58 of 2020, the beneficial owner or real beneficiaries may be:
- An individual who owns/controls the institution definitively, through direct/indirect ownership interests of 25% or more.
- An individual with more than 25% of the voting power or authority to appoint or fire a majority of the company's managers. This can be done by any other means by which he exercises ultimate control of the company.
- Where a UBO cannot be identified through the above two conditions, an individual holding a senior executive position in the company may be considered a UBO.
However, there are organizations that are exempt from this resolution. These are, for example, the following companies: (a) companies in financial free zones such as Abu Dhabi Gold Markets and Dubai International Financial Centre, and (b) companies that are directly or indirectly owned or affiliated by the federal or Emirati government.
Most registration authorities in the UAE set the deadline for filing a declaration as not later than 6 months from the end of the financial year. Failure to report ultimate beneficial owners can lead to penalties.
Economic substance regulations in the UAE (ESR)
UAE Cabinet Resolution 31 of 2019, dated April 30, 2019, introduced economic substance regulations, also known as ESRs.
Licensees conducting relevant activities must demonstrate the economic content of their business activities in the UAE. Within the stipulated deadlines, they must submit the notification and economic content report to their regulatory authorities. The obligation to demonstrate the economic content of the activity does not apply to all companies, but to those that engage in the following activities:
1. Banking business.
2. Insurance business.
3. The fund management business.
4. Financial or leasing business.
5. Intellectual property.
6. A head office business.
7. A shipping business.
8. Holding company business.
9. Distribution and Services (A licensee is considered to be engaged in the "Distribution Business" if he purchases raw materials or finished goods from a foreign group company and resells them. A licensee is considered to be engaged in the "Service Center Business" if it provides consulting, administrative, or other services to the foreign group company).
If you are subject to the Economic Content Provisions, you must file an Economic Content Notice and Report and pass a Demonstration Test of the nature of your activity.
For each fiscal period in which the Licensee receives income from the applicable activity, the Licensee will be required to take an Economic Content Test with respect to that activity. This test requires the Licensee to demonstrate that:
- the Licensee and the Relevant Activity are regulated and managed in the UAE;
- The UAE has appropriate activities in place to generate the underlying income; and
- The licensee has adequate facilities, people, and expenses in the United Arab Emirates.
Any Licensee, even if it is exempt from the reporting obligation under certain circumstances, but is engaged in established activities, will be required to file a Notice of Economic Content within six months after the end of the fiscal period (e.g., June 30, 2022, with the fiscal year ending December 31, 2021). This rule applies whether or not income was received from the activity in question. The notices must be submitted through the Treasury Department's registration portal.
Economic content reports are required only from those licensees who receive income from specified activities in the applicable fiscal year and are not exempt from this obligation. Economic content reports must be filed within a 12-month period after the end of the applicable fiscal year (e.g., December 31, 2022 with the fiscal year ending December 31, 2021)
Failure to comply with the testing, notification and reporting obligations will result in liability, up to and including the suspension, revocation, or non-renewal of the organization's trade license or permit.
Country by Country Reporting (CbCR)
Country by Country Reporting (CbCR) is part of the Base Erosion and Profit Shifting (BEPS) Action, led by the Organization for Economic Co-operation and Development(OECD) and The Group of Twenty (G20) industrialized nations.
This initiative requires large multinational enterprise groups (MNE groups) to file a CbCR report, which must include a breakdown of the multinational group's global income, pre-tax profits, accrued income tax, and certain other measures of economic activity for each jurisdiction in which the MNE operates.
The purpose of the CbCR is to bridge any information gap between taxpayers and tax administrations regarding information about where economic value is created within the MNE group. This information is to match where profits are distributed and taxes are paid globally.
The CbCR is designed for groups of companies headquartered in the UAE. These companies are part of a multinational group consisting of two or more entities that are resident for tax purposes in different jurisdictions. They have consolidated revenues equal to or greater than AED 3,150,000,000.00 in the previous fiscal year.
Companies headquartered in the UAE that meet the above criteria are subject to CbCR requirements.
A UAE tax resident ultimate parent organization of an MNE group must submit a notification that the notifying company is the ultimate parent organization of such a group, a notification to confirm that CbCR requirements apply to the MNE group, and a report detailing quantitative and qualitative information about the MNE group, such as income, profit, number of employees, business description, etc. The filing of the notice and the CbCR report must be made no later than the last day of the MNE's fiscal reporting year. An MNE group whose fiscal year begins on January 1, 2021, must file CbCR reports with the UAE no later than December 31, 2021. CbC reports and CbCR notices should be sent through the CbCR portal https://cbcrportal.mof.gov.ae/
GoAML registration and reporting
UAE legislation, developed in compliance with international anti-money laundering and anti-terrorist financing (AML/CFT) standards, establishes critical requirements that financial institutions, designated non-financial businesses and professions must meet. Designated persons include:
- Real estate brokers and agents who complete transactions on behalf of their clients in the purchase and sale of real estate.
- Dealers in precious metals and precious stones who complete a single cash transaction or multiple cash transactions that generally meet or exceed AED 55,000.
- Attorneys, notaries, and other independent legal practitioners and independent accountants plan and execute financial transactions for their clients.
- Providers of corporate services and trusts that execute transactions on behalf of their clients.
- Other professions and activities as determined by the department.
According to the Department of the Economy, each of these individuals should take the three key steps below to protect their businesses from money laundering threats:
3. Register with the goAML system. Report suspicious transactions through it, register with the Committee on Import and Export Controlled Goods' Automated Sanctions List Reporting System. Align their business transactions with the lists compiled on an ongoing basis by the system.
The goAML system is an integrated digital platform through which financial institutions, designated non-financial businesses and professions, and relevant authorities can submit suspicious transaction reports and suspicious activity reports. It is used by the Financial Intelligence Unit to quickly and efficiently collect, evaluate, and disseminate information about suspicious transactions.
By registering with this system, financial institutions and designated non-financial businesses and professions will be able to receive timely updates when an individual is included or removed from the local targeted financial sanctions list and the UN Security Council list and to take necessary steps to comply with the relevant decisions. This system sends automatic e-mail notifications to all registered agencies and authorities.
In light of the above information, we can conclude that the UAE is a very business-friendly jurisdiction. There is no unreasonably high regulation of business activities in the country. Business reporting is minimal and meets the government's goals of meeting high international standards of transparency and legality in the business environment. Make Fortune Business Solutions DMCC provides consulting services for your business and will help you fulfill any of the above responsibilities. Contact us for a free consultation and we will be happy to help with your issue.
