Bookkeeping Basics for UAE Corporate Tax | Humayun Atif CMA

Bookkeeping Basics for UAE Corporate Tax

Corporate Tax (CT) has been introduced in UAE which is a form of direct tax levied on businesses’ net profit. The corporate tax law, Federal Decree-Law No. 47 of 2022, provides guidelines for maintaining records. In this article we will discuss the guidelines for maintaining financial records for corporate tax and the Bookkeeping Basics for UAE Corporate Tax accounting.

Bookkeeping Basics

The new UAE Corporation Tax regime will require businesses to have complete and accurate bookkeeping for UAE corporate tax accounting. Maintaining accurate financial records are crucial for businesses and natural persons to remain compliant with UAE Corporate Tax laws. It is also important for correct tax calculations and to prevent over/underpayment of taxes and to avoid audits and penalties.

To update our books of accounts for CT requirements, following new accounts are suggested to opened but before going to create new accounts for CT, please note that:

• All legitimate business expenses incurred to derive taxable income are deductible but for it to be fully deductible, the expenditure needs to be incurred “wholly and exclusively” for business purposes.
• If expenditure is incurred partly for Business purposes and partly for some other purposes, the amount must be apportioned so that only the part relating to the derivation of Taxable Income will be allowed as a deduction.

Non-Deductible Expenses

Expenditure not incurred for the purposes of the Taxable Person’s Business will be consider as non-deductible expenditure which may include:

• A donation, grant or gift made to an entity that is not a Qualifying Public Benefit Entity.
• Fines and penalties, other than amounts awarded as compensation for damages or breach of contract.
• Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person.
• Amounts withdrawn from the Business by a natural person who is a Taxable Person or a partner in an Unincorporated Partnership.
• Corporate Tax.
• Input Value Added Tax incurred by a Taxable Person that is recoverable.
• Tax on income imposed outside the State.
• Expenditure incurred in deriving Exempt Income.

Please review: https://accountingblogger.com/uae-corporate-tax-deduction/

UAE Corporate Tax | Non-deductible Expenditure

Record Keeping

• Records and documents related to the CT must be maintained and kept for 7 years from the end of the tax period to which they relate.

Please also visit my detailed blog on UAE corporate Tax of Natural Persons : https://accountingblogger.com/uae-corporate-tax-of-natural-persons/

UAE Corporate Tax of Natural Persons | Humayun Atif (CMA,CPA)

Chart of Accounts

All entities may open new accounts to cater UAE Corporate Tax as follows.

1. To Book Corporate Tax Expense & Liability

• Corporate Tax Expense Account
• Provision for Corporate Tax Account

Explanation:

These accounts are required to book Corporate Tax expense and liability, so tax expense & liability allocated to the relevant financial year regardless of when it is actually paid.

2. Fines & Penalties

Fines & Penalties are not allowed as expense unless they are paid as compensation for damages or breach of contract.

Recommended Treatment:

Fines & Penalties Account to open and all non-deductible fines may be booked separately as Fines & Penalties Non-Deductible Account

3. Entertainment Expenses

These are 50% allowed and remaining 50% are considered as non-deductible so we may open two accounts as needed.

4. Donations, Grants and Gifts

It is important to note that donations made to Qualifying Public Benefit Entities (QPBE) are deductible but all other donations which are not covered in QPBE will be considered as of personal nature and will not be deductible from profits. Based on this its recommended to open two accounts as:

• Donation to Qualifying Public Benefit Entities (QPBE)
• Donation – Others

List of Qualifying Public Benefit Entities (QPBE) can be seen in Cabinet Decision No. 37 of 2023 Issued 7 Apr 2023 – (Effective on 15 Apr 2023)

5. Personal Drawings

All personal drawings from the business by a natural person or partner are non-deductible and may be debited to:

• Drawings / Current Accounts of Owners / Partners

Final Words

Bookkeeping process may be different from entity to entity and businesses may need few more accounts but above accounts will benefit accountants and managers to prepare initially for the corporate tax accounting and bookkeeping basic requirements. We recommend to also consider deferred tax impact for UAE Corporate Tax and also implement all approved IFRS for UAE Corporate Tax. It is also recommended to review all UAE Corporate Tax guidelines issued by FTA and follow all rules and regulations as per guidelines to avoid any penalties.

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com