Under the Commercial Companies Federal Law, No.32 of 2021, all companies operating in mainland UAE are obligated to have their financial accounts audited. It is also mandatory for companies in the UAE to maintain their financial records for a minimum of five years to comply with regulatory requirements.
In contrast, companies in the free zone are not necessarily required to undergo auditing and are not mandated to submit an audit report. However, certain entities within the free zone, such as free zone companies (FZCO) and free zone establishments (FZE), may be subject to mandatory auditing.
Even though a free zone entity may not be required to submit an audit report, it is essential for the company to prepare one for its internal use. This is because the audit report of the company might be requested by immigration authorities at any point in the future for verification purposes. Therefore, it is prudent for free zone companies to have their financial records in order and ready for potential inspection by relevant authorities.
Certain free zone companies, such as Dubai Multi Commodities Centre (DMCC), Dubai World Central (DWC), Dubai Airport Free Zone (DAFZA), Jebel Ali Free Zone (JAFZA), Dubai Silicon Oasis (DSO), and Dubai International Financial Center (DIFC), are required to submit their audited financial statements to the respective authorities.
For foreign companies operating in the UAE, it is compulsory to submit audit reports and audited financial statements for their branches registered in the country annually.
Companies undergoing liquidation must provide audited financial statements for the preparation of the liquidator’s audit report.
Moreover, various government authorities, including ministerial departments, municipalities, and insurance authorities, also require companies to submit their audited financial statements.
Under the Corporate Tax (CT) Law, the Federal Tax Authority (FTA) has the right to request taxpayers to submit their financial statements, which are used to calculate taxable income. Taxpayers are generally expected to prepare and maintain financial statements. A recent Decision (No. 82) stipulates that taxpayers with revenue exceeding AED 50 million during the tax period and benefiting from a zero-rate free zone regime (Qualifying Free Zone Persons) must have their financial statements audited by external auditors.
If a taxpayer belongs to a tax group comprising two or more UAE tax resident companies, the parent company is responsible for consolidating the financial statements of each subsidiary company and eliminating transactions between the group’s companies. All subsidiary companies should have the same financial year and adhere to the accepted accounting standards in the UAE, with the commonly used International Financial Reporting Standards (IFRS).
Taxpayers typically prepare their financial statements for a 12-month period, aligning with the usual tax period (e.g., from 1 January to 31 December). However, a shorter or longer tax period may be used based on specific circumstances. The accrual basis of accounting is generally employed to determine taxable income, except for cases where specific categories of individual entrepreneurs and small businesses qualify to use the cash basis of accounting.
The CT Law requires taxpayers to maintain all documents and records supporting the information in the CT return, including financial statements, for at least seven years following the end of the relevant tax period.
While the audit of financial statements was previously required only in certain free zones, an increasing number of free-zone authorities issuing trade licenses now make annual external audits a standard requirement. With the implementation of corporate tax in the UAE, more companies may need to consider conducting an annual external audit of their financial statements.
Companies should also consider preparing and maintaining audited financial statements for the financial year before the corporate tax comes into effect. This will allow them to have a formal review of their opening balance sheet for corporate tax purposes, ensuring compliance with the new tax regulations.
