Corporate Tax in the UAE

Tax Accounting Considerations

April 2023
 Enacted or substantively enacted status of law

In brief
As companies begin to focus on financial reporting in 2023, there are important corporate income tax
considerations to evaluate and assess. The UAE Federal Corporate Tax Law is now considered as enacted for
the purposes of International Financial Reporting Standards (“IFRS”). Despite no current income tax accounting
being required yet, companies need to consider whether to account for deferred income taxes for reporting
periods ended on or after 16 January 2023. To assist companies in navigating the accounting for deferred
income tax impacts during the interim reporting period, this alert highlights some key areas to consider.

In Detail
About the Corporate Tax Law
On 10 October 2022, the Corporate Tax Law appeared in the Official Gazette (becoming legally effective 15
days later). On 9 December 2022, the UAE Ministry of Finance (“MoF”) published the full text of the law
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”,
the “Law”). This means businesses will be subject to UAE Corporate Tax (“Corporate Tax”) from the beginning
of their first financial year that starts on or after 1 June 2023. Per the Cabinet of Ministers Decision No. 116
published on 16 January 2023, a standard rate of 9% (nine percent) will apply to taxable income exceeding a
threshold of AED 375,000, and a rate of 0% (0 percent) will apply to taxable income not exceeding that
threshold.

Enactment and substantive enactment

International Accounting Standard 12 Income Taxes (IAS 12) requires companies to measure deferred tax
assets and liabilities at the tax rates that are expected to apply to the period when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the
end of the reporting period. With the Cabinet Decision specifying the tax threshold having been issued, the
Law is now assessed and considered to be “enacted” effective 16 January 2023

Based on the above, companies have to assess the deferred tax implications and the estimated deferred tax
[Deferred Tax Assets (DTA) / Deferred Tax Liabilities (DTL)] for reporting periods on or after 16 January 2023,
including interim reporting.

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 Key considerations for interim tax accounting
Transitional Rules
A Taxable Person’s opening balance sheet for corporate income tax purposes will be the prior period closing
accounting balance sheet for many financial statement line items, subject to any conditions or adjustments
prescribed by future Cabinet Decisions. For these initial reporting periods, this should generally simplify
calculation of deferred tax for taxpayers. However, the transitional rules include some areas requiring further
consideration, such as:

● this principle is “subject to any conditions or adjustments that may be prescribed by the Minister”;
● the balance sheet of any company should be prepared taking into consideration the arm’s length
principles, i.e. where there are intercompany balances, their recorded value should be after the
applications of transfer pricing principles.

Further considerations could arise where companies have not previously prepared standalone financial
statements, or where there are material tax sensitive consolidation adjustments.

Potential Exemptions
Although the Law potentially exempts many companies (or subjects them to tax at a rate of 0%), some of these
companies could be viewed as taxable as the Law currently stands. This is particularly applicable where
exemptions are conditional on the specific approval of the Cabinet or Tax Authority. Free Zone Entities will also
need to assess their legal position carefully because such entities will have been promised tax free status by
the local Emirate / Free Zone, but the definitions of “Free Zone” and “Qualifying Income” remain outstanding
from the Law. Despite the apparent intent in Articles 3 & 18 to exempt certain activities of “Qualifying Free
Zone Persons” from the Law, the missing definitions make it challenging to demonstrate qualification for this
relief.

Potential Adjustments
Companies should continue to assess the impact of cabinet decisions on their corporate tax profile as these
are published to ascertain the potential deferred tax implications. Some relevant considerations could include
the items below (not an exhaustive list). It should be noted that certain adjustments will depend on the election
option available for taxpayers under the Law.

● General & specific provisioning including the expected credit loss (ECL) provisions
● Impairment provisions for inventories / property plant and equipment and other provisions recognized
as per the IFRS requirements
● Fair value unrealized gains / losses & foreign exchange gains / losses being recognized
● Interest related deductions
● Carry-forward tax losses
● Tax group consolidation related adjustments

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 Key considerations for interim tax accounting
Disclosures
While the details required to be disclosed during interim periods may be limited compared to annual
requirements, companies should ensure that significant income-tax related items are included in the
disclosures of the financial statements.These may include:

● an explanation of changes in the applicable tax rate (s) compared to the previous accounting period
(IAS 12,18d).
● an entity shall include the following information, in the notes to its interim financial statements, if not
disclosed or elsewhere in the interim financial report : the nature and amount of changes in estimates
of amounts reported in prior interim periods of the current financial year or changes in estimates of
amounts reported in prior financial years (IAS 34,16Ad)

For those companies that have already issued financial statements with a balance sheet date falling on or after
16 January 2023 on the basis that the Law is not yet enacted - this view can be accepted as a management
judgement made in uncertain circumstances and therefore is not considered an error. Analysis of the status of
the Law following the 16 January 2023 Cabinet Decision has necessarily taken an extended period of time.
Making reasonable estimates and judgments in uncertain circumstances is required by IFRS and does not
represent an error. Deferred taxes should be recorded in the next reporting period as a change in estimate.

How we can help you

We are here to help guide you on the impact of the Law from a tax accounting perspective. Together, we can
navigate the complexities and take the actions required to make sure you are compliant with the requirements
of IFRS. Our Team of dedicated finance and accounting professionals along with the subject matter experts
from the corporate tax team will assist you in reviewing tax balance sheet accounts and related deferred tax
provisioning computations.

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 The PwC UAE Team

Corporate Income Tax

Camiel Van der Meij

Senior Executive Advisor
UAE CT Leader

Driaan Rupping
Partner
UAE CT

Charles Collett
Partner
UAE CT

Tax Accounting Services

Junaid Hanif
Partner
UAE - Tax Accounting

Hatim Yousuf
Senior Manager
UAE - Tax Accounting

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Thank you

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