There are numerous commercial and managerial reasons for a company to ensure that its accounts are prepared and maintained in an accurate and timely fashion but, as the above title suggests, we are going to focus on five key regulatory reasons that make it practically mandatory to do so if operating in UAE.
- Licence Renewal – Company regulations in the UAE – both mainland and free zones – typically contain specific sections in respect of the preparation of accounts, the maintenance of accounts, appointment of auditors etc. The competent authorities are increasingly enforcing these regulations by requiring audited financial reports to be submitted at the time of licence renewals. Some companies that have been in operation for many years and have not previously prepared or submitted any audited reports, are even being asked to submit annual financial reports since the time they were established. This could be a very time-consuming and costly exercise, particularly against the pressure of a licence renewal deadline. It is advisable to maintain the book of accounts properly and have them audited every year.
- Value Added Tax (VAT) Reporting – Since 1 January 2018, when VAT was introduced in the UAE, any company exceeding the taxable supplies threshold of AED375,000 (US$100,000) is required to register with the Federal Tax Authority. Once registered, companies are then obliged to submit monthly or quarterly VAT returns on their sales, which must be categorised as standard-rated, zero-rated, exempt or ‘out of scope’ supplies. Companies are also entitled to claim input VAT on qualifying expenses. It is therefore imperative that any financial transactions are recorded accurately and in compliance with UAE’s VAT regulations because incorrect submissions can attract a variety of potential penalties. Companies are also required to maintain books of accounts and supporting records for a minimum of five years under the Federal Tax Procedures Law. Failure to do so will attract a penalty of AED10,000 at first instance with an additional AED50,000 for repeat violations. When Federal Tax Authority (FTA) agents carry out VAT audit, they will compare VAT submissions against accounting records and ledgers, trial balance and financial statements. Accurate bookkeeping and preparation of financial accounts are therefore essential.
- Economic Substance Regulations – UAE is a member of the OECD/G20 Inclusive framework on Base Erosion and Profit Sharing (BEPS). In order to implement comply with BEPS Action 5 addressing ‘harmful tax practices’, the UAE has introduced Economic Substance regulations from effect from 1 January 2019. All mainland, Free Zone or offshore companies in the UAE are required to notify the authorities if they are carrying out any of the relevant activities as defined by the regulations. If they are, there is a further requirement to carry out an Economic substance test and submit a report no later than 12 months after the last day of the end of the company’s financial year. A range of financial and non-financial information has to be declared and it is highly recommended to maintain books of accounts and supporting records in order to submit accurate reports, as well as to be able to substantiate returns easily if required to do so by the authorities.
- Country-by-Country Reporting – Under BEPS Action 13, any UAE tax resident entity that is part of a Multinational Enterprise (MNE) with a consolidated group turnover of AED3.15 billion or above in the preceding financial year is required to submit a Country-by-Country Report (CbCR). A CbCR notification is required if the entity in the UAE is a subsidiary company, while additional reporting will be required if it is an ultimate parent entity. It is important to remember that the turnover threshold is for the entire group and not for the UAE-based entity. This may bring many companies based in the UAE that are subsidiaries of MNEs operating outside the UAE within the scope of CbC reporting. Incorrect or late filing can attract penalties ranging from AED50,000 to more than AED1 million.
- Liquidation – There are many different reasons why it may be necessary to wind up a company if a company’s owner or owners decide it has no reason to continue operating – unprofitability, strategic restructuring, the sale of underlying assets or the exit of a key member. To deregister your company in UAE, you must first cancel all your permits and licences, and a liquidator must be appointed. Registered auditors will have to prepare a liquidation report and they will require previous audit reports, trial balance and profit and loss for the current period, as well as the balance sheet as at liquidation date. Regular bookkeeping and maintenance of accounting records will greatly assist auditors to finalise the liquidation report.
Sovereign Dubai has a team of qualified chartered accountants and tax experts that will be able to provide a comprehensive accounting service to your organisation that will serve to fulfil each of these regulatory requirements. We have a highly flexible approach and will tailor our services to suit the actual requirements of our clients.
If you require any further guidance on the regulations or how they might be applicable to your organisation specifically, our client accounting team offers a free one-hour consultation to clients during the month of May 2020.