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UAE

IAS 12 deferred tax in UAE: IFRS Standards as issued by the IASB (UAE applies full IFRS for listed entities and many other entities)

The UAE introduced corporate income tax for the first time through Federal Decree-Law No. 47 of 2022, effective for financial years beginning on or after 1 June 2023. The standard rate is 9% on taxable income exceeding AED 375,000. Income up to AED 375,000 is taxed at 0%. This means that for most UAE entities with material deferred tax positions, the applicable rate for IAS 12 is 9%. The introduction of corporate tax is a watershed moment for UAE financial reporting: entities that previously had no income tax expense, no current tax, and no deferred tax must now build these computations from scratch. Every asset and liability on the balance sheet needs a tax base determination, and every difference between the carrying amount and tax base creates a potential temporary difference. The UAE tax system applies to all UAE-resident persons (including companies incorporated in the UAE, companies effectively managed in the UAE, and natural persons conducting business), with exceptions for government entities, extractive industry entities (subject to emirate-level taxation), and qualifying free zone persons. The free zone regime is particularly significant: entities operating in designated free zones that meet the qualifying conditions (maintaining adequate substance, earning qualifying income, complying with transfer pricing rules) benefit from a 0% rate on qualifying income and the standard 9% rate on non-qualifying income. For deferred tax, this creates a split-rate calculation similar to Ireland: temporary differences that reverse through qualifying income carry deferred tax at 0% (no deferred tax), while those reversing through non-qualifying income carry deferred tax at 9%.

Regulatory context: Securities and Commodities Authority (SCA); Ministry of Finance for corporate tax administration; Federal Tax Authority (FTA) for VAT and excise

The SCA (Securities and Commodities Authority) regulates listed entities on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM). The SCA has issued guidance requiring listed entities to comply with IFRS, including IAS 12, and has noted that the introduction of corporate tax will require significant changes to financial reporting. The SCA's 2024 review of financial statements identified that some entities had not recognised deferred tax in their first reporting period under the new regime, either because they assumed the tax didn't apply to them or because they hadn't yet completed the tax base determination exercise. The Ministry of Finance has published detailed guidance on the corporate tax law, including the treatment of transitional rules. Ministerial Decision No. 120 of 2023 provides relief for entities transitioning to the new regime: opening tax bases of assets and liabilities are set at the IFRS carrying amounts at the start of the first tax period, with an irrevocable election available to use the fair value or historical cost as the opening tax base for immovable property, intangible assets, and financial assets. This election directly affects the opening deferred tax position, and entities should model both options before electing.

Practical guidance for UAE

UAE practitioners face a unique challenge: building IAS 12 computations from nothing. Unlike jurisdictions with established tax systems where the deferred tax computation evolves incrementally each year, UAE entities must perform a complete first-time recognition exercise. This involves determining the tax base of every material asset and liability under the new law. For most assets, the transitional rule sets the tax base equal to the IFRS carrying amount at the start of the first tax period, which means the opening temporary differences are zero. But there are exceptions. If the entity elects to use fair value as the opening tax base for qualifying assets (under Ministerial Decision No. 120), and the fair value differs from the IFRS carrying amount (for example, investment property measured at cost under IAS 40 where the fair value is higher), the election creates an opening temporary difference. Conversely, if the entity elects historical cost and the IFRS carrying amount has been adjusted for revaluations, impairments, or fair value movements, the difference between the carrying amount and the historical cost base creates an opening temporary difference. Going forward, the typical temporary differences will be familiar: depreciation timing differences on property, plant, and equipment (the UAE tax law allows depreciation at prescribed rates that may differ from accounting useful lives), provisions not deductible until paid, IFRS 16 lease temporary differences, and ECL provisions for banking entities. The UAE law disallows certain expenses for tax (entertainment expenses above 50% of the incurred amount, fines and penalties, donations above the prescribed limits), creating permanent differences rather than temporary ones. Permanent differences don't create deferred tax but do affect the current tax computation and the rate reconciliation. Free zone entities face the additional complexity of the split between qualifying and non-qualifying income. An entity in DIFC (Dubai International Financial Centre) or ADGM (Abu Dhabi Global Market) with both qualifying financial services income (0% rate) and non-qualifying income (9% rate) must determine which temporary differences relate to each income stream. This requires the entity to maintain separate records for qualifying and non-qualifying activities and allocate assets and liabilities accordingly.

Audit expectations

Given that this is a new tax regime, auditors in the UAE are building their IAS 12 expertise simultaneously with the entities they audit. The SCA has indicated it will review corporate tax disclosures in listed entity financial statements. Auditors should focus on: verifying the transitional tax base elections and their impact on opening deferred tax, testing the completeness of temporary differences (particularly for entities that have never performed this exercise), and assessing the split between qualifying and non-qualifying income for free zone entities. The UAE corporate tax law includes a small business relief election (for revenue below AED 3M), under which the entity is treated as having no taxable income. Entities electing this relief would not recognise deferred tax. Auditors should verify whether the election was made and whether the revenue threshold condition is met.

UAE-specific considerations

The UAE corporate tax law includes several provisions that create specific temporary differences or affect the deferred tax calculation. Tax grouping is available for UAE resident entities with 95% or more common ownership, allowing them to file a single tax return. Within a tax group, transfers of assets between group members can qualify for relief (no gain or loss for tax purposes), preserving the transferor's tax base in the hands of the transferee. This relief defers the tax event and creates or preserves temporary differences. Transfer pricing rules (aligned with the OECD Transfer Pricing Guidelines) apply to transactions between related parties and connected persons. The arm's length principle requires that transactions be priced as if between independent parties. If a related-party transaction is adjusted for transfer pricing purposes (increasing taxable income), the adjustment may not affect the IFRS carrying amounts, creating a permanent difference in the current period. However, if the adjustment relates to an asset (for example, a transfer pricing adjustment on the sale of an asset that changes the proceeds for tax purposes), it may also affect the tax base of the asset in the purchaser's hands, creating a temporary difference. Tax losses can be carried forward for a maximum of 10 years and can offset up to 75% of taxable income in any year (with no minimum threshold). This carry-forward restriction must be modelled in the IAS 12.24 recoverability assessment. There is no loss carry-back provision. The UAE does not impose withholding tax on dividends, interest, or royalties paid to non-residents (as of the current legislation). This means that IAS 12.39 considerations for temporary differences on investments in subsidiaries are less complex than in jurisdictions with withholding taxes, because there is no additional tax on repatriation of profits.

Common inspection findings

The SCA found that several UAE listed entities did not recognise any deferred tax in their first reporting period under the new corporate tax regime, despite having material temporary differences between IFRS carrying amounts and tax bases.

Entities did not document their Ministerial Decision No. 120 elections for opening tax bases, making it impossible for auditors to verify the starting point for the deferred tax computation.

Free zone entities applied the 0% rate to all temporary differences without assessing whether specific items related to non-qualifying income that should carry deferred tax at 9%.

The 10-year loss expiry and 75% utilisation restriction were not modelled in the recoverability assessment for deferred tax assets on carried-forward losses.

Entities in tax groups failed to adjust the tax bases of assets transferred between group members under the relief provisions, resulting in incorrect temporary differences and misstated deferred tax.