Can small businesses use cash basis accounting for Corporate Tax?

Article 2 – Preparing Financial Statements Using the Cash Basis of Accounting For the purposes of paragraph (a) of Clause 5 of Article 20 of the Corporate Tax Law, a Person may prepare Financial Statements using the Cash Basis of Accounting, in any of the following instances: 1. Where the Person derives Revenue that does not exceed AED 3,000,000 (three million United Arab Emirates dirhams). 2. In exceptional circumstances and pursuant to an application submitted by the Person to the Authority.

Article 20 – General Rules for Determining Taxable Income 1. The Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the State. 2. The Taxable Income for a Tax Period shall be the Accounting Income for that period, and to the extent applicable, adjusted for the following: a. Any unrealised gain or loss under Clause 3 of this Article. b. Exempt Income as specified in Chapter Seven of this Decree-Law. c. Reliefs as specified in Chapter Eight of this Decree-Law. d. Deductions as specified in Chapter Nine of this Decree-Law. e. Transactions with Related Parties and Connected Persons as specified in Chapter Ten of this Decree-Law. f. Tax Loss relief as specified in Chapter Eleven of this Decree-Law. g. Any incentives or special reliefs for a Qualifying Business Activity as specified Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 26 in a decision issued by the Cabinet at the suggestion of the Minister. h. Any income or expenditure that has not otherwise been taken into account in determining the Taxable Income under the provisions of this Decree-Law as may be specified in a decision issued by the Cabinet at the suggestion of the Minister. i. Any other adjustments as may be specified by the Minister. 3. For the purposes of calculating the Taxable Income for the relevant Tax Period, and subject to any conditions that the Minister may prescribe, a Taxable Person that prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis in relation to: a. all assets and liabilities that are subject to fair value or impairment accounting under the applicable accounting standards; or b. all assets and liabilities held on capital account at the end of a Tax Period, whilst taking into account any unrealised gain or loss that arises in connection with assets and liabilities held on revenue account at the end of that period. 4. For the purposes of paragraph (b) of Clause 3 of this Article: a. “Assets held on capital account” refers to assets that the Person does not trade, assets that are eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets. b. “Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this DecreeLaw, or liabilities treated under applicable accounting standards as noncurrent liabilities. c. “Assets and liabilities held on revenue account” refers to assets and liabilities other than those held on a capital account. d. An “unrealised gain or loss” includes an unrealised foreign exchange gain or loss. 5. Notwithstanding Clauses 1 and 3 of this Article, the Minister may prescribe any of the following for the purposes of this Decree-Law: a. The circumstances and conditions under which a Person may prepare financial statements using the cash basis of accounting. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 27 b. Any adjustments to the accounting standards to be applied for the purposes of determining the Taxable Income for a Tax Period. c. A different basis for determining the Taxable Income of a Qualifying Business Activity. 6. Subject to any conditions prescribed under Clause 5 of this Article, a Taxable Person can make an application to the Authority to change its method of accounting from cash basis to accrual basis from the commencement of the Tax Period in which the application is made or from the commencement of a future Tax Period. 7. In the case of any conflict between the provisions of this Decree-Law and the applicable accounting standards, the provisions of this Decree-Law shall prevail to that extent.

Article 1 – Definitions Words and expressions in this Decision shall have the same meanings specified in the Federal Decree-Law No. 47 of 2022 referred to above (“Corporate Tax Law”), and the following words and expressions shall have the meanings assigned against each, unless the context otherwise requires: Financial Statements : A complete set of statements as specified under the Accounting Standards applied by the Taxable Person, which includes, but is not limited to, statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity and cash flow statement. Ministerial Decision No. 114 of 2023 – As published by Ministry of Finance 1 Cash Basis of Accounting : An accounting method under which the Taxable Person recognises income and expenditure when cash payments are received and paid.

since they no longer meet the conditions prescribed under Article 20(5) of the Corporate Tax Law. However, there is potential for this to qualify as an “exceptional circumstance” for which an application can be made and the FTA may approve or not the continued use of the Cash Basis of Accounting (see Section 4.2.3). 4.2.6. Interaction with Small Business Relief Businesses that elect for Small Business Relief are able to prepare financial statements based on the Cash Basis of Accounting, if their revenue does not exceed AED 3 million.17 One of the conditions of Small Business Relief is that Revenue does not exceed AED 3 million,18 where Revenue is the gross amount of income derived during a Tax Period calculated according to applicable accounting standards. According to Ministerial Decision No. 114 of 2023, the applicable accounting standard is International Financial Reporting Standards (“IFRS”) or IFRS for SME’s. However, a Person may prepare Financial Statements using the Cash Basis of Accounting, where the Person derives Revenue that does not exceed AED 3 million, as explained in Section 4.2.1. Accordingly, a Person may apply either IFRS (or IFRS for SMEs) or the Cash Basis of Accounting in order to calculate their Revenue to determine if they are eligible for Small Business Relief. The Cash Basis of Accounting is always used to determine eligibility to prepare Financial Statements on the Cash Basis of Accounting for Corporate Tax purposes. Therefore, if IFRS or IFRS for SMEs is used to determine Revenue for the purpose of Small Business Relief, the cash basis still has to be used with regard to eligibility for the Cash Basis of Accounting. 17 Ministerial Decision No. 114 of 2023. 18 Article 2(1) of Ministerial Decision No.73 of 2023. Corporate Tax Guide | Accounting Standards | CTGACS1 19