FTA Clarifies Corporate Tax Details, Defining the First Tax Period for New Businesses

The Federal Tax Authority (FTA) has confirmed that the first tax period for a newly established company, in respect of a juridical person subject to corporate tax, is determined by the first financial year, as stipulated under the commercial companies law.

The Corporate Tax Law applies to tax periods commencing on or after June 1, 2023, and the tax period for the taxable person is the financial year or part thereof for which a tax return must be filed.

This information was provided in a recent public clarification issued by the FTA to raise awareness about the first tax period for corporate tax for juridical persons.

The public clarification also addresses the timeline for tax deregistration in the event of the cessation of businesses or business activities before or during the first tax period.

According to the public clarification, if the first financial year of newly established companies under the Commercial Companies Law begins on or after June 1, 2023, this financial year is considered the first tax period for corporate tax purposes.

If the financial year under the Commercial Companies Law is not a standard 12-month period but ranges between 6 and 18 months, the FTA accepts this period as the first tax period for corporate tax purposes.

However, if the first financial year begins before June 1, 2023, the first tax period will be the subsequent 12-month financial year that begins on or after June 1, 2023, with each subsequent tax period being the 12 months following the end of the first tax period.

In a press statement, the FTA stated that the new public clarification aims to shed light on the first tax period for corporate tax purposes.

It clarified that the first tax period applies to:

* A juridical person who is a taxable person subject to the provisions of the Commercial Companies Law.

* A non-resident person who is a juridical person with a permanent establishment in the UAE.

* A resident person who is a juridical person incorporated, established, or recognised under the applicable legislation of a foreign jurisdiction, but is effectively managed and controlled in the UAE.

The public clarification has indicated that a taxable person’s tax period for which a tax return must be filed is the financial year or part thereof, as per the corporate tax law.

The financial year of a taxable person shall be the Gregorian calendar year, or the 12-month period for which the taxable person prepares financial statements.

For juridical persons incorporated, formed, or established under the Commercial Companies Law, their first financial year under the commercial companies law may not necessarily be a 12-month period but instead can be between 6 and 18 months.

The financial year followed by the taxable person under the Commercial Companies Law shall be accepted as the financial year and, therefore, will be the tax period for corporate tax purposes.

In such circumstances, the taxable person is not required to apply to the FTA to change its tax period. Instead, this will be calculated based on the information provided upon registration for corporate tax purposes.

This differs from other situations where a taxable person is required to apply to the FTA to change its tax period.

The public clarification added that if the first tax period is longer or shorter than 12 months, there is no pro-rating of the various thresholds prescribed under the corporate tax law, such as the revenue threshold for small business relief.

The only exception is the de minimis threshold for the purposes of the general interest deduction limitation rule (currently set at Dh12 million).

According to the public clarification, for a non-resident person with a permanent establishment in the UAE, the first tax period will be the financial year or part thereof beginning from when the permanent establishment first commenced operations.

Where such activities began before June 1, 2023, the first tax period will be the first financial year commencing on or after June 1, 2023.

However, where such activities began on or after June 1, 2023, the first tax period will be from when the non-resident person’s activities began (i.e., from when it started operating) until the end of the financial year of the non-resident person, provided that the tax period is not less than 6 months or more than 18 months.

When a juridical person is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction but is a resident person by virtue of being effectively managed and controlled in the UAE, the first tax period will be the financial year or part thereof commencing on or after June 1, 2023.

The public clarification stated that if a company ceases its business or business activity, whether by dissolution, liquidation, or otherwise, during the first tax period, the taxable person is required to apply for tax deregistration.

The cessation of a taxable person’s business or business activities during its first tax period does not impact its obligation to register for corporate tax; a taxable person must still register for corporate tax even if the cessation occurs after the start of the first tax period.

In such cases, a taxable person must submit a tax deregistration application within the deadline of 3 months from the deregistration triggering event.

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