Audit requirements for Free Zone Companies based in DMCC, DWC and JAFZA
Many Free Zone Companies incorporated in DMCC (Dubai Multi Commodities Centre), DWC (Dubai World Central) and JAFZA (Jebel Ali Free Zone) are leaving themselves exposed to potential fines and the non-renewal of their trading licence for failure to comply with one particular regulatory requirement – each of these free zones states that companies must prepare and file annual audited accounts.
This requirement is clearly set out in a company’s articles of association and yet many company officers and directors remain unaware of, or sometimes simply dismiss, the need to maintain proper financial records, even for their internal purposes, or to appoint an approved auditor.
In order to clarify the requirements to prepare and submit annual audited accounts, Arun Gurung, Head of Finance at Sovereign Corporate Services Dubai, has compiled a series of “frequently asked questions” that are based on genuine client enquiries.
- Q1. There is no tax in Dubai, so surely there is no need to maintain company accounts?
- Q2. What is the deadline for the submission of the audited financial report?
- Q3. What happens if I fail to submit an audited financial report on time?
- Q4. I am closing my Free Zone Company down and have already closed my company bank account. Do I still need to prepare an audited financial report?
- Q5. Although my Free Zone Company was incorporated over a year ago, I haven’t yet started trading and don’t even have a bank account. Do I still need an audited financial report?
- Q6. My Free Zone Company was renewed recently without submitting an audited financial report. Why do I need to prepare the reports now?
- Q7. It has not been a year since my Free Zone Company was incorporated. Do I still need to prepare an audited financial report?
- Q8. We intend to prepare our own financial reports. Can I simply file these with the authorities?
- Q9. How can Sovereign Corporate Services assist us?
A1. Firstly it is not entirely true to say that there is no tax in Dubai. Companies in the oil and gas industry and branches of foreign banks operating in Dubai are subject to corporation tax. Similarly, there are municipality taxes applicable to hotel businesses, other entertainment facilities and commercial rental businesses. Nevertheless, the majority of other businesses are indeed not subject to corporation tax. However, this should not be construed as a reason for failing to prepare financial accounts.
Secondly, a financial statement is a formal record of the financial activities of a business. It shows the financial position (assets, liabilities and shareholders’ equity), financial performance (profit or loss) and the cash flow of a company. It not only assists the company directors to make informed decisions in respect of future financial planning, but
also assists external partners such as banks or vendors to make decisions about a company’s borrowing capacity. With the introduction of VAT in January 2018, it will be more essential than ever that company accounts are kept in good order.
DMCC, DWC and JAFZA require all companies incorporated in their jurisdictions to prepare and submit audited accounts for each financial year.
A2. The current requirement is to submit the reports to the authorities within 90 days of a Free Zone Company’s financial year-end. DWC further requires financial report to be submitted as part of the licence renewal process.
A3. Free Zone Companies may be subject to an AED 5,000 (approximately $1,400) financial penalty for every month that an audited financial report is outstanding. Companies can however request for an extension of the deadline for the submission of these reports. The principal risk that companies bear for failing to submit audited financial reports is the non-renewal of their trade licence.
A4. If you have elected to close a Free Zone Company down, you will need to file for the liquidation of that company. A liquidator must be appointed and a liquidator’s report will have to be filed with the authorities. Since the liquidator will need to ascertain that all a company’s liabilities are settled and there are no assets remaining, it will require audited financial reports for previous years.
A5. This is a common enquiry from clients who are trying to set up a business in their first year after incorporation. Even if a Free Zone Company has not started trading, its shareholders will have paid out for various expenses such as incorporation fees, office rents/flexi-desk rents, consultancy fees, visa fees, visa deposits and more. All sums of money received and expended by a company, and the matters in respect of which the receipt and expenditure takes place, need to be recorded and should be reflected on a financial statement.
A6. Generally, the consultants who assist with your Free Zone Company renewals will submit a letter to the authorities explaining that the audit report is underway and will be submitted when complete. Sometimes, the authorities are more lenient at the first renewal. However, the authorities will request audited financial reports sooner or later. It is therefore better to prepare and submit these reports on a yearly basis.
A7. It depends. According to the articles of association, a Free Zone Company’s financial year constitutes a 12-month period from January to December. No first financial year may exceed 18 months or be for less than 6 months. This means, if a company is incorporated in July 2016, then the first year’s financial report can be prepared in December 2017. However, if the company is incorporated in June 2016, the first year financial report will have the year-end as December 2016 and will consist of only 7 months.
A8. Free Zone Companies can by all means maintain their own financial statements. However, these financial records need to be independently verified by the auditors that are approved by the Free Zone Authorities before they can be submitted.
A9. Sovereign Corporate Services equips its clients with the knowledge and understanding that is essential for successful market entry and growth initiatives in the UAE and Middle East region. We have been assisting our clients with incorporation of companies in various onshore and offshore jurisdictions around the world since 1997.
Sovereign Corporate Services partners with reputable local and international audit firms and will assist in matching our clients with an audit company that is appropriate to its requirements and budget. We also provide full support during the audit of the company by liaising with auditors, preparing necessary schedules, confirmation letters and answering queries on behalf of clients. Our in-house qualified and experienced chartered accountants can further provide clients with complete bookkeeping and accounting services at a very competitive rate.
