Is your business ready for the UAE's new Corporate Tax regime?

The UAE introduced a landmark development in its fiscal landscape with the implementation of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”). Effective for Tax Periods commencing on or after June 1, 2023, this law establishes the framework for the taxation of corporations and businesses in the country. Accompanied by ministerial decisions and FTA clarifications, the legislation provides detailed guidance on how companies must comply with the new regime.

One of the key features of the Corporate Tax Law is the concept of a Tax Group, which allows two or more entities to be treated as a single Taxable Person for the purposes of UAE Corporate Tax. The ability to form a Tax Group can simplify administration, improve efficiency in filing, and provide consolidated visibility of taxable income. However, specific conditions, as set out in Article 40 of the Corporate Tax Law, must be satisfied, and formal approval is required from the Federal Tax Authority (FTA). Once established, the Tax Group must prepare Aggregated Financial Statements (AFS) to determine its combined taxable income and meet all compliance obligations.

Key Conditions for Forming a Tax Group

To ensure fairness and consistency, the law imposes strict conditions for creating a Tax Group:

1. Juridical Persons Only
   All members of the Tax Group must be juridical persons. Natural persons are excluded from membership.
2. Parent Company Ownership and Control
   The Parent Company must exercise dominant ownership and control over its subsidiaries by:
   
   • Owning at least 95% of the share capital.
   • Holding at least 95% of the voting rights.
   • Being entitled to at least 95% of the subsidiary’s profits and net assets.
3. These thresholds can be met directly or indirectly through one or more subsidiaries.
4. Exclusion of Exempt or Qualifying Free Zone Persons
   Neither the Parent Company nor any Subsidiary may be an Exempt Person or a Qualifying Free Zone Person, as these categories enjoy different tax treatments under UAE law.
5. Same Financial Year
   All members of the Tax Group must share the same Financial Year.
6. Uniform Accounting Standards
   Members must prepare financial statements under the same accounting framework, applying consistent policies. If differences exist, subsidiaries must align their reporting with the Parent Company’s standards.

By meeting these conditions, businesses ensure their Tax Group operates under a unified framework, streamlining compliance with the Corporate Tax Law UAE while enabling the FTA to accurately assess taxable income on a consolidated basis.

Understanding Aggregated Financial Statements (AFS)

With the implementation of the UAE Corporate Tax Law, Tax Groups must prepare Aggregated Financial Statements (AFS). Unlike consolidated financial statements prepared under IFRS for investors and regulators, AFS serve a unique purpose under Ministerial Decision No. 114 of 2023: to determine a Tax Group’s Taxable Income and ensure compliance with the Federal Tax Authority (FTA).

Purpose-Driven for Corporate Tax

AFS are not optional; they are a statutory requirement. Their main function is to calculate the Tax Group’s combined taxable results and support the filing of the Corporate Tax return. Unlike consolidated statements that aim to show a “true and fair view” of performance, AFS follow a special purpose framework, focusing only on arriving at the aggregated accounting profit, which is then adjusted to calculate Taxable Income.

Distinction from Consolidated Statements

It is important to differentiate AFS from consolidated financial statements:

• Starting Point: AFS begin with the standalone IFRS financials of each group member, not consolidated reports.
• Exclusion of IFRS 3 & IFRS 10: Adjustments for goodwill, bargain purchases, and fair value changes are excluded, preventing tax distortions.
• Business Combinations: Where no new legal entity is created, related assets, liabilities, and goodwill are aggregated directly from the acquiring entity’s accounts.
• Special Purpose Framework: AFS explicitly depart from certain IFRS rules, and these deviations must be disclosed.

Core Components of AFS

A complete set of AFS includes:

• Aggregated Statement of Financial Position
• Aggregated Statement of Profit or Loss
• Aggregated Statement of Other Comprehensive Income
• Aggregated Statement of Changes in Equity

All must be prepared in UAE Dirhams (AED) and include comparative data from the previous period (unless it is the first reporting year).

Preparation and Aggregation Rules

• Uniform Accounting Policies: All members must follow the same standards, aligned with the Parent Company.
• Intercompany Eliminations: Transactions within the Tax Group must be eliminated. However, deductible losses recognized before joining remain until reversed (clawback rule).
• Non-Group Transactions: Dealings with external entities remain intact.
• Investments: Internal investments are aggregated without elimination; external investments are recorded at cost less impairment.
• Other Taxes: Foreign and non-UAE taxes are included in pre-tax profit before arriving at Taxable Income.

Disclosure Requirements

AFS must include:

• The special purpose framework applied
• The basis of aggregation and member details
• Key accounting policies and judgments
• Explanatory notes, consistent with IAS 1 standards

The introduction of AFS represents a major change in financial reporting in the UAE. By applying the FTA’s rules correctly, Tax Groups can ensure compliance, minimize risks of penalties, and establish a transparent tax base. While the framework diverges from IFRS, a clear understanding of AFS preparation, aggregation rules, and disclosure requirements is essential for accurate and compliant tax reporting.

Key Rules for Preparing Aggregated Financial Statements (AFS)

With the introduction of the UAE Corporate Tax Law, Tax Groups are now required to prepare Aggregated Financial Statements (AFS) in line with Ministerial Decision No. 114 of 2023. These statements are essential for calculating a Tax Group’s Taxable Income and differ significantly from traditional consolidated financial statements under IFRS. Instead, AFS follows a special purpose framework designed exclusively for corporate tax compliance.

Below are the key rules for preparing AFS, highlighting their purpose, methodology, and deviations from IFRS principles.

Starting Point: Aggregation of Standalone Financials

AFS begin with the standalone financial statements of each approved member of the Tax Group, prepared under IFRS or IFRS for SMEs. Once aggregated, adjustments are applied under the special purpose framework:

• Only pre-tax profit or loss of each member is aggregated.
• UAE Corporate Tax balances (current or deferred) are not aggregated.
• Only entities formally approved by the Federal Tax Authority (FTA) as part of the Tax Group can be included.

This ensures that the AFS focus purely on establishing a reliable tax base, not IFRS compliance.

Uniform Accounting Policies

All group members must use consistent accounting policies and have the same financial year. If a subsidiary uses different policies, adjustments must be made to align with the Parent Company. This is both a legal requirement under Article 40 of the UAE Corporate Tax Law and a practical necessity for producing comparable AFS.

Intercompany Eliminations

AFS requires the elimination of intra-group transactions to avoid overstating income. Eliminations include:

• Intercompany balances
• Intragroup income and expenses
• Unrealized gains/losses
• Provisions and valuation adjustments

Exceptions to Eliminations:

• Deductible Loss Rule: While intercompany eliminations are crucial for preparing Aggregated Financial Statements (AFS) to avoid overstating income, an important exception exists: the Deductible Loss Rule. This rule stipulates that if a loss was recorded by a member before joining the Tax Group, related transactions remain until that loss is reversed.
  • Hypothetical Example: Imagine 'SubCo B' joins a Tax Group. Before joining, SubCo B incurred a significant operating loss of AED 1,000,000. After joining, SubCo B sells an asset to another group member, 'ParentCo', at a profit of AED 300,000. Normally, this unrealized intercompany gain would be eliminated from the Aggregated Financial Statements (AFS). However, under the Deductible Loss Rule, this AED 300,000 gain might not be eliminated immediately. Instead, it could be recognized within the Tax Group's AFS, potentially offsetting a portion of SubCo B's pre-existing AED 1,000,000 deductible loss. The elimination of such a gain would only occur once the pre-existing loss is fully utilized or reversed.
• Investments & Equity: Parent investments and Subsidiary equity are aggregated without elimination, excluding goodwill and fair value changes.
• Impairments: Any impairment on intergroup investments must remain in the AFS.
• Business Combinations (no legal entity): Assets, liabilities, and goodwill are fully aggregated from the acquirer’s standalone accounts.
•  

IFRS Deviations and Special Purpose Framework

AFS intentionally depart from IFRS consolidation rules:

• No recognition of goodwill, bargain purchases, or fair value adjustments.
• IFRS 3 (business combinations) and IFRS 10 (consolidation) do not apply.
• The statements must clearly disclose that they are prepared solely for UAE Corporate Tax compliance.

Other Essential Requirements

• Currency: Must be presented in AED.
• Comparatives: Prior-year data required, except for the first Tax Period.
• Required Reports:
  
  • Aggregated Statement of Financial Position
  • Aggregated Statement of Profit or Loss
  • Aggregated Statement of Other Comprehensive Income
  • Aggregated Statement of Changes in Equity
• Non-Group Investments: Subsidiaries, JVs, and associates outside the group are carried at cost less impairment.

AFS plays a central role in UAE Corporate Tax compliance. By aggregating standalone accounts, ensuring consistency, applying eliminations with specific exceptions, and clearly disclosing deviations from IFRS, businesses can establish a transparent tax base. Though the framework is complex, especially around eliminations, strict adherence to these rules helps avoid penalties and compliance risks. Engaging qualified tax advisors ensures accurate preparation in line with FTA requirements.

Audit Requirements for Tax Groups under UAE Corporate Tax

With the introduction of the UAE Corporate Tax regime, Tax Groups, treated as a single Taxable Person, must comply with strict financial reporting and audit requirements. A central element of this compliance is the preparation and audit of Aggregated Financial Statements (AFS) to ensure accuracy, consistency, and transparency for the Federal Tax Authority (FTA).

Mandatory Audit from January 1, 2025

• From January 1, 2025 onwards, all Tax Groups, regardless of size or revenue, must prepare and maintain audited special purpose Financial Statements.
• The audit ensures the FTA receives verified and standardized financial records, minimizing risks of errors or non-compliance.
• This universal rule enhances trust and transparency across the tax system.

Transitional Audit Rules (Before January 1, 2025)

• For Tax Periods commencing before January 1, 2025, audits are only mandatory if a Tax Group’s consolidated revenue exceeds AED 50 million.
• Groups below this threshold are exempt, reducing the initial compliance burden during the rollout phase.

Type of Audit Required

• The audit is a special purpose audit of AFS, distinct from statutory audits.
• It must comply with International Standards on Auditing (ISA).
• The auditor’s report confirms AFS are prepared in line with the specific policies disclosed in the notes, focusing strictly on tax compliance.

Relief for Individual Members

• Individual entities within a Tax Group are not required to maintain audited standalone financial statements for Corporate Tax purposes, even if their revenue exceeds AED 50 million.
• Compliance is assessed only at the group level, reinforcing the concept of the Tax Group as a single Taxable Person.

Submission Requirements

• Audited AFS must be filed with the Tax Return, within nine months from the end of the relevant Tax Period.
• The auditor’s report is restricted in use, intended only for the FTA and group management, and not suitable for wider financial purposes.

The UAE audit framework ensures that Tax Groups meet Corporate Tax obligations efficiently. By mandating special purpose audits, exempting standalone entity audits, and introducing phased requirements, the FTA has created a system that balances compliance, clarity, and reduced administrative burden.

Financial Implications When a Member Leaves a Tax Group

When a Subsidiary exits a Tax Group, or when the Tax Group itself dissolves, certain financial and tax rules ensure continuity and accurate calculation of Taxable Income.

Consistent Accounting Basis

The departing entity must prepare its standalone Financial Statements using the same accounting basis and policies applied by the Tax Group. This consistency ensures comparability and prevents distortions in Corporate Tax reporting.

Opening Values for Assets and Liabilities

The leaving member must adopt the values recorded by the Tax Group as the opening balances in its standalone accounts.

• If accounting standards do not allow these values, the member must compute its Taxable Income as if they were permitted.
• Example: If a Tax Group recorded an asset at AED 100, but the standalone books show AED 120, the departing company must use AED 100 for Corporate Tax purposes.

Clawback Rule

Under Article 42(9), if an asset or liability is transferred within the Tax Group and either party leaves within two years, the previously eliminated gain/loss is reinstated (“clawed back”). The leaving entity’s opening asset values are adjusted accordingly.

Hypothetical Example (Clawback Rule): Suppose 'ParentCo' sells a piece of land to its subsidiary, 'SubCo Y', for AED 5,000,000, realizing an intercompany profit of AED 1,500,000. For the purpose of the Tax Group's AFS, this AED 1,500,000 intercompany profit on the land transfer is initially eliminated. Now, if 'SubCo Y' subsequently leaves the Tax Group 18 months later (which is within the two-year period), the previously eliminated AED 1,500,000 gain will be reinstated or 'clawed back'. Consequently, 'SubCo Y', as the leaving entity, will be required to adjust the opening value of that land in its standalone accounts to reflect this reinstated gain, which will then impact its future Taxable Income calculations.

This framework ensures fairness, prevents tax leakage, and aligns standalone and group-level reporting.

Disclosure Requirements for AFS

The Aggregated Financial Statements (AFS) must follow specific disclosure rules to maintain transparency and meet the standards set by the UAE Corporate Tax Law. These disclosures ensure that the Federal Tax Authority (FTA) receives a complete and reliable view of the Tax Group’s financial position.

Key disclosure requirements include:

1. Framework of Preparation
   
   • Clearly state the framework under which the AFS are prepared.
   • Mention that they are special-purpose financial statements, designed only for FTA submission.
2. Basis of Aggregation
   
   • Identify all entities forming part of the Tax Group.
   • Disclose the Parent Company’s ownership structure, including share capital, voting rights, and entitlement to profits or assets—whether held directly or indirectly.
3. Accounting Policies & Judgments
   
   • Present the material accounting policies, estimates, and judgments applied in preparing the AFS.
   • This ensures clarity on the principles and assumptions behind the financial data.
4. Explanatory Notes
   
   • Provide notes to support reported figures.
   • Align disclosures with IAS 1: Presentation of Financial Statements for consistency and reliability.

By including these disclosures, AFS ensures clarity, accuracy, and compliance, strengthening trust between the Tax Group and the FTA.

Conclusion

The introduction of the UAE Corporate Tax regime and the concept of Tax Groups marks a significant shift in the country’s financial and compliance landscape. By allowing multiple entities to be treated as a single Taxable Person, the law simplifies administration but also places strict responsibilities on businesses. The preparation of Aggregated Financial Statements (AFS) under a special purpose framework, adherence to uniform accounting policies, elimination rules, and mandatory disclosures are central to ensuring transparency and accurate tax reporting.

With mandatory audits for all Tax Groups from January 1, 2025, and clear rules on the financial implications when a member joins or leaves a group, the framework provides consistency while minimizing risks of tax leakage. Although the requirements diverge from traditional IFRS principles, their purpose is targeted—ensuring a reliable tax base for the Federal Tax Authority (FTA).

Navigating these intricate rules, especially concerning AFS preparation, intercompany eliminations, and the new audit requirements, often demands expert support to ensure full compliance and avoid penalties. This is precisely where Filing Buddy can assist your business.

Why Filing Buddy is Your Trusted Partner for UAE Corporate Tax Compliance

The clock is ticking — 30th September 2025 is a crucial deadline for UAE corporate tax compliance. Filing your corporate tax return on time ensures peace of mind and protects your business from penalties. The key is to prepare early and work with a trusted corporate tax consultant who fully understands FTA requirements.

At Filing Buddy, we specialize in corporate tax, compliance, and advisory services, helping businesses across the UAE file corporate tax returns accurately, on time, and stress-free. Our team ensures 100% compliance while giving you the confidence to focus on growing your business.

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Stay compliant. Stay stress-free. Filing Buddy is your trusted partner for UAE corporate tax filing.