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Accounts and Financial Statements in UAE Corporate Tax Regime

Posted on by TIS Blog

The UAE’s Corporate Income Tax regime, introduced under Federal Decree-Law No. 47 of 2022, has reshaped how businesses across Dubai, Abu Dhabi, and the wider UAE approach their financial reporting. At the core of every corporate tax return sits a set of accounts and financial statements that determine taxable income, support compliance, and serve as the foundation for FTA assessments.

Getting your financial statements right is not just about meeting a regulatory checkbox. It directly affects how your taxable income is calculated, what deductions you can claim, and whether you face penalties during an FTA review. For business owners, CFOs, and finance managers operating in the UAE, understanding the financial statements requirements under the corporate tax law is essential to staying compliant and avoiding costly errors.

This guide breaks down the key requirements around accounts and financial statements, including who must prepare audited financials, the applicable accounting standards, special obligations for Tax Groups and Free Zone entities, and the deadlines that apply for the 2025 and 2026 tax periods.

Accounting Standards Accepted Under UAE Corporate Tax

The UAE Corporate Tax Law requires that taxable income be determined based on the financial statements of the business, prepared in accordance with internationally recognized accounting standards. Specifically, the accepted standards are International Financial Reporting Standards (IFRS) and IFRS for Small and Medium-sized Entities (IFRS for SMEs).

The choice between IFRS and IFRS for SMEs depends on the size and nature of the business. Larger entities, particularly those with revenue exceeding AED 50 million or those operating within Tax Groups, will generally need to use full IFRS. Smaller businesses that qualify for IFRS for SMEs may find the simplified framework more practical, though they should ensure it aligns with their FTA reporting obligations.

What matters from a corporate tax perspective is that the financial statements form the starting point for calculating taxable income. Adjustments are then made for items that the tax law treats differently from accounting standards, such as provisions, fair value changes, related party transactions, and certain capital expenditures. A reliable set of books, maintained by qualified professionals, is non-negotiable. Our Bookkeeping and Outsource Accounting services support businesses in maintaining IFRS-compliant records throughout the year, so you are never scrambling at filing time.

Who Must Prepare Audited Financial Statements?

Not every business in the UAE is required to prepare audited financial statements for corporate tax purposes. However, specific categories of taxable persons are mandated to do so under Ministerial Decision No. 84 of 2025, which came into effect for tax periods starting on or after 1 January 2025.

The following entities must prepare and maintain audited financial statements:

  • Taxable persons (not part of a Tax Group) with revenue exceeding AED 50 million during the relevant tax period
  • Qualifying Free Zone Persons (QFZPs), regardless of their revenue threshold, since audited financials are a prerequisite for claiming the 0% corporate tax rate on qualifying income
  • Tax Groups, which are now required to prepare audited special purpose aggregated financial statements for each tax period

For non-resident persons, only revenue derived through a permanent establishment or nexus in the UAE counts toward the AED 50 million threshold. This ensures that the audit obligation is tied to UAE-sourced business activity rather than global revenue. If your business falls into any of these categories, our Audit and Assurance team can manage the entire audit process in line with International Standards on Auditing (ISA).

Financial Statement Requirements for Tax Groups

Tax Groups face distinct reporting obligations. Under FTA Decision No. 7 of 2025, all Tax Groups are required to prepare and maintain audited special purpose aggregated financial statements for each tax period starting on or after 1 January 2025, regardless of revenue.

These aggregated financial statements are prepared under a special purpose framework and involve:

  • Line-by-line aggregation of the standalone financial statements of all group members (parent and subsidiaries)
  • Elimination of intra-group transactions to prevent double-counting
  • Uniform accounting policies applied across all entities within the group
  • Presentation in UAE Dirhams (AED)
  • Audit in accordance with International Standards on Auditing (ISA) for special purpose frameworks

An important clarification is that individual members of a Tax Group are not required to maintain audited standalone financial statements solely for corporate tax purposes, even if their individual revenues exceed AED 50 million. The audit obligation rests at the group level through the aggregated statements.

Businesses forming or already operating within a Tax Group should ensure their subsidiary-level records are aligned with the parent company’s accounting policies. Discrepancies in policy application across group members can lead to aggregation errors that trigger FTA scrutiny. Our Financial Consultancy and Advisory team works with multi-entity structures across Dubai, Abu Dhabi, and Freezone jurisdictions to ensure consistency and compliance.

Small Business Relief and Record-Keeping Obligations

Small businesses with revenue of AED 3 million or less during a tax period may elect for Small Business Relief (SBR) for tax periods ending on or before 31 December 2026, provided revenue did not exceed this threshold in any prior tax period starting on or after 1 June 2023.

Businesses that qualify for SBR are not required to prepare audited financial statements. However, they are still obligated to maintain proper books and records that substantiate their revenue levels and support all conditions for eligibility. The FTA can request these records at any time during a review or audit.

Even if your business qualifies for SBR, maintaining organized and accurate records is a compliance requirement that protects you in case of an FTA inquiry. The key records to maintain include:

  • General ledger, trial balance, and chart of accounts
  • Sales and purchase invoices with supporting documentation
  • Bank statements reconciled with accounting records
  • Payroll records and employee-related expenses
  • Fixed asset registers and depreciation schedules

Our Bookkeeping and Outsource Accounting services help small businesses across the UAE maintain FTA-compliant records without the overhead of an in-house finance team.

Filing Deadlines and Submission Requirements

Corporate tax returns, along with audited financial statements (where applicable), must be submitted to the FTA within nine months from the end of the relevant tax period. For a business with a financial year ending 31 December 2025, the filing deadline is 30 September 2026.

The filing process is completed through the FTA’s EmaraTax portal. Tax Groups must submit their audited aggregated financial statements together with the corporate tax return. The same nine-month deadline applies.

Key points to keep in mind:

  • Late filing attracts penalties starting at AED 500 per month for the first 12 months, increasing to AED 1,000 per month thereafter
  • Late payment of corporate tax now carries a penalty of 14% per annum under the revised penalty regime (effective 14 April 2026 under Cabinet Decision No. 129 of 2025)
  • Errors discovered after filing can be corrected through a voluntary disclosure via the EmaraTax portal, which typically results in lower penalties compared to FTA-discovered errors

Planning your filing timeline well in advance is critical. If your business requires support with corporate tax return preparation and filing, or if you need your financial statements audited, our team of 40+ qualified professionals (CPAs, CGMAs, CMAs) at Asad Abbas & Co. is equipped to manage the process from start to finish.

How Accurate Financial Statements Reduce Tax Risk

The connection between the quality of your financial statements and your corporate tax exposure is direct. Inaccurate or incomplete financials can lead to understated income, overstated deductions, or misclassified transactions, all of which carry penalty risk during an FTA audit.

Areas where financial statement accuracy has the most tax impact include:

  • Revenue recognition timing and completeness
  • Related party transaction disclosures and transfer pricing documentation
  • Treatment of provisions, impairments, and fair value adjustments
  • Classification of exempt versus taxable income for Free Zone entities
  • Correct application of depreciation rates and capital expense treatment

For businesses operating across multiple industries, such as real estate, construction, manufacturing, and retail, the complexity of transactions and the volume of records make professional oversight essential. Asad Abbas & Co., with over 10 years of UAE experience, 1000+ audits completed, and RERA, Freezone, and FTA certifications, brings the expertise needed to ensure your financials hold up under scrutiny.

Conclusion

Accounts and financial statements are the backbone of corporate tax compliance in the UAE. The rules have become more defined with Ministerial Decision No. 84 of 2025 and FTA Decision No. 7 of 2025, and the expectations from the FTA are clear: accurate, IFRS-compliant financials, prepared and audited where required, submitted on time. For Tax Groups, the shift to mandatory audited aggregated financial statements from 2025 onward adds another layer of complexity that demands early preparation. For smaller businesses, maintaining organized records is equally important to protect SBR eligibility and withstand FTA reviews. The cost of non-compliance, from penalties to lost tax benefits, far outweighs the investment in proper financial reporting. If your business needs support with audit, bookkeeping, or corporate tax advisory, contact Asad Abbas & Co. to ensure your financial statements meet every requirement the FTA expects.

Frequently Asked Questions (FAQs)

1. What accounting standards must be used for UAE corporate tax financial statements?

The UAE Corporate Tax Law requires financial statements to be prepared in accordance with International Financial Reporting Standards (IFRS) or IFRS for Small and Medium-sized Entities (IFRS for SMEs), as specified under Ministerial Decision No. 114 of 2023. Taxable income is derived from these financial statements, with adjustments made for items that the tax law treats differently from accounting standards. Businesses should choose the framework appropriate to their size and complexity, and ensure their accounting records are maintained consistently throughout the year to support the annual corporate tax return. Working with a qualified audit and assurance firm ensures your financial statements meet the applicable IFRS standards and FTA requirements.

2. Which businesses in the UAE are required to prepare audited financial statements for corporate tax?

Under Ministerial Decision No. 84 of 2025, audited financial statements are mandatory for three categories of taxable persons: standalone entities with revenue exceeding AED 50 million during the tax period, Qualifying Free Zone Persons (regardless of revenue), and all Tax Groups. For non-resident persons, only revenue derived through a permanent establishment or nexus in the UAE is counted. Businesses below the AED 50 million threshold that are not QFZPs or part of a Tax Group are not required to prepare audited financials, though they must still maintain adequate books and records. Our Corporate Income Tax services can help you determine your specific audit obligations.

3. What are aggregated financial statements, and do all Tax Groups need them?

Aggregated financial statements are special purpose financial statements prepared by combining the standalone financials of all members within a Tax Group. They require line-by-line aggregation, elimination of intra-group transactions, and uniform accounting policies across all entities. From tax periods starting 1 January 2025, all Tax Groups must prepare and maintain audited aggregated financial statements regardless of revenue. These must be audited under International Standards on Auditing (ISA) and submitted to the FTA along with the corporate tax return within nine months of the financial year end. Our Financial Consultancy and Advisory team assists multi-entity structures with group-level compliance.

4. Can small businesses in the UAE avoid preparing audited financial statements?

Yes. Small businesses with revenue of AED 3 million or less may elect for Small Business Relief (SBR) for tax periods ending on or before 31 December 2026, provided the revenue threshold was not exceeded in any prior tax period starting from 1 June 2023. These businesses are not required to prepare audited financial statements. However, they must maintain proper books and records to substantiate their revenue and prove eligibility for SBR. The FTA can request these records during an audit or review. Using our Bookkeeping and Outsource Accounting services ensures your records are always organized, accurate, and FTA-ready.

5. What is the deadline for filing corporate tax returns and audited financial statements in the UAE?

Corporate tax returns, along with audited financial statements (where required), must be filed with the FTA within nine months from the end of the relevant tax period. For a business with a 31 December 2025 financial year end, the deadline falls on 30 September 2026. Filing is done through the FTA’s EmaraTax portal. Late filing penalties start at AED 500 per month for the first 12 months and increase to AED 1,000 per month after that. Late payment of corporate tax now carries a 14% per annum penalty under Cabinet Decision No. 129 of 2025. Planning your corporate tax filing and audit well ahead of the deadline helps avoid penalties and last-minute complications.

6. How do financial statement errors affect corporate tax compliance in the UAE?

Errors in financial statements can directly distort taxable income, leading to underpayment or overpayment of corporate tax. Common issues include incorrect revenue recognition, misclassified exempt versus taxable income, unsupported provisions, and inaccurate related party disclosures. If the FTA identifies material misstatements during an audit, the business may face penalties for understatement, additional tax assessments, and increased scrutiny in future periods. Filing a voluntary disclosure through the EmaraTax portal before the FTA discovers the error significantly reduces the penalty exposure. Working with experienced financial consultants and auditors minimizes the risk of errors reaching the FTA.

All About Participation Exemption Under UAE Corporate Tax

Posted on by Abbasaccounting

The UAE companies that own a share in other companies have a dire question each tax period: will the dividends and capital gains on such investments be again taxed in the UAE? The participation exemption is the answer to that. As a part of the Corporate Tax system established by the Federal Decree-Law No. 47 of 2022, the specified provision eradicates the occurrence of taxation on the same investment income twice.

In the case of holding companies, cross-border subsidiaries in businesses and other corporate forms, this exemption has a direct impact on the amount of corporate tax that you pay, the deductions that you claim, and the manner in which you invest. The rules have been kept up to date – most recently, by Ministerial Decision No. 302 of 2024, which relates to tax periods beginning 1 January 2025.

What Is the Participation Exemption Under UAE Corporate Tax?

Participation exemption gives the opportunity to the UAE resident businesses to exclude some income as taxable ownership interest in the taxable income. When your UAE entity is holding shares or capital of another juridical person and satisfies the specified requirements, the dividends, capital gains, and foreign exchange gains, as well as impairment gains of such investment are not included in the UAE Corporate Tax.

The legal foundation sits in Article 23 of the Corporate Tax Law, supported by Ministerial Decision No. 116 of 2023 (for tax periods before 1 January 2025) and Ministerial Decision No. 302 of 2024 (for periods from 1 January 2025 onwards). Experienced corporate tax consultants in UAE can help determine which exemption route applies to your specific holding structure.

Domestic vs. Foreign Participation

Article 22 provides that the dividends received on a UAE resident company are tax-free without any further requirements. Article 23, which is known as the participation exemption is the exemption applicable to foreign investments, and in this case special requirements have to be met.

Conditions for Qualifying as a Participating Interest

The Corporate Tax Law places five fundamental conditions in Article 23 (2) that have to be fulfilled simultaneously. These are:

  • Ownership requirement– UAE taxable person has to have a 5 per cent ownership stake in the shares or capital of a juridical person. Instead, this condition will be fulfilled with less than 5% ownership in case the historical acquisition cost is AED 4 million or above.
  • Holding period – The ownership interest should have been continuously owned or should have been owned continuously during 12 months. In the case of capital gains, the actual holding period of 12 months is to be taken into consideration; intention is not enough.
  • Subject to tax test – The participation should be liable to corporate tax or a similar tax at a statutory rate of at least 9 percent in its residence state.
  • Profit entitlement- The ownership interest should give the taxable person at least 5% of the distributable profits and at least 5% of the liquidation proceeds. This is not applicable in the case where the AED 4 million acquisition cost condition is fulfilled.
  • Asset test – Not over 50 per cent of the direct and indirect assets of the participation can be in the form of ownership interests which would otherwise not be the subject of exemption had they been held directly. After 2025, this test will only be used where the participation is a Related Party.

Key 2025 Amendments Under Ministerial Decision No. 302 of 2024

AED 4 Million Threshold Now Replaces All Three Tests

In MD 116 the 5% ownership condition was simply substituted with the AED 4 million acquisition cost alternative. The investors were still required to meet the profit entitlement and asset tests individually. MD 302 overcomes this: once the cost of acquisition is over AED 4 million you do not have to comply with the requirements of the ownership, profit entitlement, and asset test. This comes as a massive reprieve to minority investors in high-value foreign entities.

Statutory Rate Clarification

The new framework acknowledges the subject-to-tax test which is the statutory rate. When a subsidiary is situated in a country with a 12% statutory rate with local incentives and this would lower the effective rate to 7 per cent, the exemption applies. Instead, participation may be qualified by showing that it has an effective tax rate of 9 or above in the period.

Asset Test Limited to Related Parties

The 50 percent asset composition limit has been reduced to situations where it is a Related Party participation. In the case of arms-length and unrelated investments, this test no longer provides a barricade to asserting the exemption.

Foreign PE Loss Recapture

Since 2025, where a taxable person in the UAE used losses on taxable activities in a Foreign Permanent Establishment beforehand, these losses should be recaptured in full before the participation exemption is availed of income on converting that PE into a participation.

Types of Income Exempt Under the Participation Exemption

This is due to the fact that types of income that are exempt under the Participation Exemption are as follows:

  • Dividends and other dividend payments on the foreign participation.
  • Capital gains or losses on the transfer, sale or disposal of a participating interest.
  • The gains or losses associated with foreign exchange of the interest involved.
  • The impairment gains or losses concerning the participating interest.

The exemption is also symmetrical: in case you are eligible, capital losses, foreign exchange losses, and impairment losses of the same investment are equally non-deductible against other taxable income.

Treatment of Related Expenses

The expenses incurred in the acquisition, selling, or disposition of a participating interest such as professional fees, due diligence, or litigation expenses are not deductible. These are capitalized under the costs of acquisition. The interest paid on acquisition and maintenance of a participating interest is however deductible under the general interest limitation provisions.

Management overhead attributable to earning exempt income should be allocated carefully. Businesses working with qualified corporate tax consultants in UAE can categorize these costs correctly and avoid FTA compliance issues.

Participation Exemption and Free Zone Entities

Those who qualify as Free Zone Persons (QFZP) enjoy 0% corporate tax on qualifying income which can arguably restrict the practical necessity of participating exemption on qualifying income. Nonetheless, the income that does not meet the qualifying definition of the QFZP is subject to taxation at 9% and the exemption of participating comes into play in such circumstances. Investments made by exempt persons including government entities and qualifying investment funds are also exempted.

A Practical Example

One of the companies in Business Bay, Dubai, is a UAE mainland business, which owns 15 percent of a German subsidiary that is taxed at an approximate rate of 30 percent statutory. The retention has been more than two years. All requirements are satisfied: the ownership has to be more than 5, holding is more than 12 months, statutory rate should be more than 9, and the subsidiary is not a passive shell. The UAE does not tax dividends and capital gains obtained by this stake.

On the other hand, a UAE based organization on the Al Reem Island, Abu Dhabi, owns 3 percent of a foreign company purchased at AED 5 million. Even though the ownership falls short of the 5 percent, AED 4 million threshold is achieved. This is qualifying under the 2025 regulations without necessarily satisfying either the profit entitlement or asset tests.

Common Compliance Mistakes to Avoid

The exemption of participation is not an automatic one. Those that do not record eligibility or misuse the regulations are liable to reassessment by the FTA. The most common mistakes are:

  • The lack of the documentation of the holding period of 12 months or the intent to hold at the time of purchase.
  • Making an assumption that all the foreign dividends are exempt without checking the statutory tax rate in the foreign country.
  • Expenses related to acquisitions and which ought to be capitalized are deducted.
  • Overlooks loss recapture regulations on Foreign PE conversions.

Professional corporate income tax services ensure eligibility criteria are documented and the exemption is applied in full compliance with FTA requirements.

Why This Exemption Matters for UAE Businesses

As the Domestic Minimum Top-Up Tax (DMTT) will impact large multinational enterprises and the availability of R&D tax credits towards 2026, the participation exemption will continue to be a pillar of the tax system in the UAE that is friendly to investors. To businesses that have operations in Dubai, Abu Dhabi, ADGM and UAE free zones, the exemption offers significant tax planning to group restructurings, cross-border mergers and capital reallocation plans.

The company operates as Asad Abbas & Co. Chartered Accountants LLC in providing corporate tax compliance and corporate tax advisory services to more than 5,000 clients in 14+ industries. Our 40+ qualified (CPAs, CGMAs, CFMs, CMAs) professionals will assist holding companies, group structures, and multinational businesses in properly implementing the participation exemption on a tax period basis. We have over 10 years of experience in the UAE, which we add to every engagement in our offices in the Business Bay, Dubai, and Al Reem Island, Abu Dhabi.

Evaluate Your Eligibility

If your business holds ownership interests in domestic or foreign entities, a structured review can uncover tax savings and prevent compliance risks. Our corporate income tax services cover eligibility assessment, documentation, FTA return filing, and audit support.

Frequently Asked Questions

Q: What is the exemption of participation under UAE Corporate Tax?

A: This is a clauses in Article 23 of the UAE Corporate Tax Law that enables businesses that are qualified to exclude dividends, capital gains, and other associated income on ownership interest in other firms in their taxable income to avoid the possibility of paying tax twice.

Q: What are the requirements of exemption of participation in UAE?

A: The ownership interest has to satisfy five requirements: 5 per cent ownership (or AED 4 million cost of acquisition) and holding period of at least 12 months, foreign entity taxed at 9 per cent or above, 5 per cent profit entitlement and related parties asset composition test.

Q: What is the AED 4 million threshold of acquisition cost?

A: According to the Ministerial Decision No. 302 of 2024, in case the ownership interest is acquired at a price not less than AED 4 million, the 5% ownership, profit and asset tests are not obligatory. The holding period and subject-to-tax conditions are the only ones that remain.

Q: Do dividends of UAE companies not receive corporate tax?

A: Yes. Article 22 of the Corporate Tax Law provides that the dividends of UAE resident companies are tax-free. The conditions of detailed participation exemption provided under Article 23 are mainly used with regards to foreign entity dividends.

Q: How is there capital losses under the participation exemption?

A: The exemption is applied on gains and losses equally. Losses of capital, foreign exchange and impairment of a qualifying participating interest are not deductible against other income taxable to the taxpayer.

Q: What is the implication of the participation exemption on free zone companies?

A: 0% of the qualifying income taxes are reduced in QFZPs thus eliminating the participation exemption of qualifying income. But in the case of non-qualifying income in which there will be taxation of 9 percent, then there is the participation exemption of article 23.