Foreign Tax Credit and Foreign-Sourced Income for UAE QFZPs
Understanding Foreign Tax Credit (FTC) under UAE Corporate Tax Law Foreign companies are often attracted…
Financial reporting in UAE: Mandatory Audit Requirements
An audit of financial statements in the UAE is a thorough, independent examination to ensure accuracy, compliance with laws, and adherence to applicable accounting standards (typically International Financial Reporting Standards / IFRS).
A Ministerial Decision No. 84 of 2025 requires any taxable person with revenue exceeding AED 50 million prepare and maintain audited financial statements as per UAE corporate tax law.
Audited financial statements increase the reliability of accounting records for financial transparency.
Note
For almost all businesses, relevant tax period effectively means preparing audited financial statements on an annual basis (e.g. 1 January – 31 December or 1 April – 31 March).
Why statutory audit of financial records matters for FTA Compliance
Generally, audits help businesses detect potential fraud, identify weaknesses in internal controls, and streamline financial operations.
Audits can also be performed, but not limited to:
- Establish financial credibility and stakeholder confidence on a company’s financial position, especially when fundraising or taking out loans
- For legal compliance, in the case of QFZP and the UAE CT Law
- Internal audit reports to ensure compliance (i.e. corporate governance, operational audits, IT audits)
Unlike other businesses that only require audits after a certain threshold is passed, every Qualifying Free Zone person must maintain audited financial statements.
Calculations for corporate tax start with accounting profit, and audited accounts by external auditors provide greater confidence that records are complete and reliable.
QFZPs can submit this together with their Corporate Tax returns, along with other documents for Federal Tax Authority’s reviews or further audits.
Weak documentation or any proof of non-arm’s length pricing can lead to tax adjustments, loss of preferential treatment, administrative penalties and reassessments.
Who is required to maintain audited financial statements? (e.g. Distribution Activities and AED 50 million Requirement)
Since 1 January 2025, audited financial statements are mandatory for:
- Every Qualifying Free Zone Person (QFZP) regardless of revenue
- Any Taxable Persons exceeding AED 50 million revenue threshold
- Tax Groups must prepare audited financial statements following FTA requirements. Individual members are not required to separately prepare their own, as the tax group functions as a single Taxable Person for corporate tax purposes.
- For non-residents, only revenue sourced through UAE’s permanent establishments or nexus counts toward the AED 50 million threshold.
Ministerial Decision No. 84 specifically states that a QFZP carrying on distribution activities from a Designated Zone may be subject to additional procedures prescribed by the FTA.
Note
An individual company within a Tax Group may still have to undergo a statutory audit for other reasons, such as:
- It falls under free zone regulations,
- It is required under another regulator,
- For lender or shareholder requirements, or
- For its constitutional documents
However, those are separate from the Corporate Tax audit requirement under Ministerial Decision No. 84 of 2025.
What is the typical financial statement audit process?
A QFZP is not required to prepare separate audited financial statements for Qualifying Income, Taxable Income and Excluded activities.
Instead, the business prepares one audited set of financial statements for the fiscal year, then maintains required documentation to support their business operations.
Supporting documentation may include:
- management schedules
- revenue allocation workings
- transaction classifications
- contracts
- transfer pricing documentation where applicable
- calculations supporting the De Minimis test
The audit supports the integrity of the accounting records, while the supporting schedules explain how the Corporate Tax rules were applied.
What needs to be in the audit report?
The audited financial statements become part of the evidence supporting:
- accounting profit
- taxable income calculations
- QFZP status and qualifying income calculations
During an FTA review, the Authority may examine:
- audited financial statements
- general ledger
- invoices
- revenue derived from Qualifying and Excluded Activities
- transfer pricing documentation
- allocation schedules
- related-party transactions
- supporting calculations
The audit alone does not prove QFZP eligibility.
Preparing Audited Financial Statements (UAE Free Zone Companies Guide)
Businesses prepare financial statements for each financial year:
- Statement of Financial Position (Balance Sheet)
- Statement of Profit or Loss
- Statement of Cash Flow
- Statement of Changes in Equity
- Notes to the Financial Statements
- Independent Auditor’s Report
The auditor issues an opinion on whether the financial statements present fairly, in all material aspects, the company’s financial position.
Typical Audit Stages
This a typical stage observed by auditors, but additional procedures may be added depending on how big and complex the company is.
- Company provides its accounting records and supporting documents to the auditor.
- Audit starts by viewing and reconciling bank accounts.
- Auditor reviews ledgers and verifies invoices
- Confirm balances (i.e. annual revenue, etc)
- Verify sample transactions
- Review internal controls
- Verify supporting documents
- Auditor discusses audit findings with the company
- Once everything is confirmed, auditor issues signed audit report
- Company submits audited financial statement.
Approved Auditors for UAE Free Zone Companies
Many UAE free zones require annual audits to be conducted by auditors appearing on the free zone’s Approved Auditor List.
Examples include:
- DMCC
- JAFZA
- DAFZA
- RAKEZ
- SAIF Zone
- Ajman Free Zone
Each authority maintains its own approved audit firms and procedures.
Not every free zone follows identical requirements, so businesses should verify the current approved auditor list with their licensing authority.
Record keeping for Resident and Non Resident Persons
Financial ledgers and supporting documents must be securely stored for a minimum of 5 years under commercial law, or 7 years for compliance under Corporate Tax Law.
In the UAE, audit requirements vary based on the type and location of company registration, with annual audits may be required for Free Zone companies depending on the relevant Free Zone Authority, licensing rules, constitutional documents, or Corporate Tax status. Mainland companies may also require audits for regulatory, banking, shareholder, or Corporate Tax reasons.
Note
UAE corporate tax filing brings together several areas that businesses often treat separately: accounting records, taxable income, deductions, exemptions, related-party transactions, and supporting documentation.
The challenge is making sure these pieces reconcile into a defensible tax position before the return is submitted. For businesses approaching their first filings, understanding the mechanics of the process early can help prevent costly adjustments, compliance issues, and unnecessary surprises later.
Corporate Tax Compliance & Penalties for Late Reporting (Obligations for UAE companies)
All legal entities in the UAE, including Free Zone companies, are required to register for corporate tax purposes, and compliance with timely tax reporting is essential to maintain their tax status.
Avoid penalties by seeking further guidance on the UAE’s corporate tax policy. Most compliance issues are avoidable; Skrooge’s expert inhouse team can help you. Simply book a free consultation with us and we will get back to you.
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