Audited financial statements are documents that confirm the correctness and entirety of a company's financial records. They are prepared by qualified auditors who examine the company’s transactions, documents, and internal controls. The UAE has a corporate tax law that governs the taxation of businesses in the country. The law also sets out the criteria for businesses that need to have their books of accounts audited by a qualified auditor. This article will discuss the types of businesses that fall under this criterion, as well as the advantages of having audited financial statements for other purposes.
Accounting Methods and Standards for Corporate Tax Purposes
According to the corporate tax law, a taxable person is any person who conducts a trade or business in the UAE, whether as a sole proprietor, a partnership, a company, or a legal entity. A taxable person is obliged to prepare financial statements for each tax period, which is normally a fiscal year unless otherwise approved by the Federal Tax Authority. The corporate tax law permits two accounting methods for preparing financial statements: the cash basis and the accrual basis. Income and expenses are recorded in the cash basis of accounting upon cash receipt or payment, whereas in the accrual basis of accounting, they are recorded when they are earned or incurred, regardless of cash flows.
Revenue Threshold for Audited Financial Statements
Under Ministerial Decision No (82) of 2023, outlining the corporate tax legislation in the UAE, enterprises earning over AED 50 million during a tax period are obligated to compile and maintain audited financial statements for that particular duration. This requirement applies to all taxable persons, irrespective of their legal form or activity. This means that any business that surpasses this revenue threshold must have its financial statements checked by an auditor and submit them to the tax authority.
This requirement is expected to reduce the compliance cost for small and medium enterprises (SMEs) that have lower revenues and may not have the budget to afford an audit. However, SMEs should still consult with corporate tax consultants in Dubai to ensure that they comply with the other aspects of the corporate tax law.
Corporate Tax Requirements: Audited Financial Statements for Qualifying Free Zone Persons
To meet corporate tax obligations, qualifying free zone persons must furnish audited financial statements. These are businesses that operate in certain free zones in the UAE that are designated as qualifying free zones by the Minister of Finance. These businesses enjoy a 0% tax rate on their qualifying income, which is the income derived from their activities within the free zone.However, to benefit from this tax exemption, qualifying free zone persons must prepare and keep audited financial statements for each tax period, regardless of their revenue amount. This is to ensure that they report their income correctly and do not engage in any tax evasion or avoidance practices. Qualifying free zone persons should seek the advice of corporate tax consultants in Dubai to determine their eligibility and obligations under this category.
Mandatory Financial Audits for Dubai and UAE Companies
Certain company types in Dubai and the UAE are obligated to undergo crucial financial audits. Large private companies with paid-up capital over AED 10 million or annual revenue exceeding AED 30 million, public shareholding companies, foreign company branches in Dubai, companies in liquidation, and certain limited liability companies must comply with mandatory audits. This ensures fiscal responsibility, transparency, and protection of stakeholders' interests.
Other Benefits of Audited Financial Statements
Besides complying with the corporate tax law, there are other reasons why businesses should have their financial statements audited by a professional auditor. Some of these reasons are:
- Licensing and Renewal Procedures: - Some free zone authorities require businesses to submit audited financial statements as part of their licensing and renewal procedures, even if they are not qualifying free zone persons.
- Financial Institutions' Requirements: - Banks and other financial institutions may require businesses to provide audited financial statements as a condition for granting loans or other facilities.
- Regulatory Compliance: - Insurance brokers and companies, as well as exchange houses, are required by the Central Bank of the UAE (CBUAE) to have their financial statements audited and submitted to the regulator.
- Sector-Focused Regulatory Measures: - The Department of Economy and Tourism (DET) imposes sector-specific regulations on hotels, necessitating the auditing and submission of their financial statements to the authority.
- Investor Confidence: - The trust and confidence of investors and potential buyers can be bolstered by the availability of audited financial statements.
Therefore, having audited financial statements can enhance the credibility and transparency of a business and help it achieve its goals and objectives.
The UAE corporate tax law requires businesses that have a revenue of more than AED 50 million in a tax period, or that operate in certain free zones, to have their financial statements audited by a qualified auditor. The objective is to ensure that they meet their responsibility of paying a just proportion of taxes and adhere to the legal framework. Moreover, having audited financial statements can also benefit businesses in other ways, such as securing loans, obtaining licenses, attracting investors, and improving their reputation. Businesses should consult with corporate tax consultants in Dubai to understand their obligations and benefits under the corporate tax law.
