What Is a Deferred Tax Liability?
A Deferred Tax Liability (DTL) generally represents future tax consequences arising from taxable temporary differences.
For example, where an asset's carrying amount is higher than its tax base, the difference may represent a taxable temporary difference and potentially result in a DTL.
Current Tax vs Deferred Tax
Current tax and deferred tax are related but they are not the same.
Current tax represents the Corporate Tax payable or recoverable for a particular tax period based on the applicable tax rules.
Deferred tax reflects the future tax consequences of temporary differences and certain unused tax attributes under the applicable accounting framework.
In simple terms:
Current tax = tax relating to the current tax position
Deferred tax = future tax effect of temporary differences and other qualifying items
This distinction is important for businesses preparing IFRS financial statements in the UAE.
How Does UAE Corporate Tax Affect Deferred Tax?
UAE Corporate Tax applies to financial years beginning on or after 1 June 2023, subject to the applicable rules.
The introduction of Corporate Tax can create differences between accounting measurements and the amounts recognised for tax purposes. These differences may need to be reflected as deferred tax under the applicable financial reporting framework.
The UAE Federal Tax Authority has issued guidance explaining the relationship between accounting standards and UAE Corporate Tax. Businesses should therefore consider both the UAE tax legislation and the applicable accounting requirements when assessing deferred tax.
It is important to understand that UAE Corporate Tax legislation and IAS 12 serve different purposes. The tax legislation determines the tax rules, while IAS 12 governs the accounting treatment of income taxes for entities applying IFRS.
What Creates Temporary Differences?
Temporary differences can arise from several areas of a company's financial statements.
Depreciation and Fixed Assets
Accounting depreciation and tax treatment may differ.
- Accounting carrying amount: AED 1,000,000
- Tax base: AED 800,000
The AED 200,000 difference needs to be assessed under IAS 12 to determine whether it represents a taxable or deductible temporary difference.
The important point is that deferred tax is determined by comparing the accounting carrying amount with the tax base, rather than assuming that a particular depreciation method automatically creates a DTA or DTL.
Provisions and Impairments
A business may recognise a provision or impairment expense in its financial statements before the amount becomes deductible for Corporate Tax purposes.
If the accounting and tax treatment occur in different periods, a temporary difference may arise.
However, an accounting provision does not automatically create a deferred tax asset. The applicable tax treatment and IAS 12 recognition requirements must also be considered.
Tax Losses
Tax losses may also give rise to a deferred tax asset when they can be utilised against future taxable income under the applicable UAE Corporate Tax rules.
However, recognition of a DTA for tax losses requires appropriate evidence that sufficient future taxable profits are likely to be available.
Businesses may therefore need to consider:
- Historical profitability
- Future taxable profit forecasts
- Reversal of existing taxable temporary differences
- Business plans
- Applicable tax-loss restrictions
Revaluations and Fair-Value Adjustments
Revaluations, fair-value movements and similar accounting adjustments can also create differences between financial statement carrying amounts and tax bases.
Each difference should be assessed based on the specific accounting treatment and UAE tax rules applicable to the transaction.
Which UAE Corporate Tax Rate Is Used for Deferred Tax?
The UAE Corporate Tax system generally provides:
- 0% on taxable income up to AED 375,000
- 9% on taxable income exceeding AED 375,000
However, businesses should not automatically apply 9% to every deferred tax balance.
Under IAS 12, deferred tax is generally measured using the tax rate expected to apply when the related asset is recovered or liability is settled, based on tax rates that are enacted or substantively enacted by the reporting date.
The company's expected tax position therefore needs to be considered when determining the appropriate rate.
Deferred Tax for UAE Free Zone Businesses
Free Zone businesses require additional consideration under the UAE Corporate Tax regime.
A Qualifying Free Zone Person may benefit from a 0% Corporate Tax rate on qualifying income, while income that does not qualify for the preferential treatment may be subject to the applicable 9% rate.
Therefore, a Free Zone business should not automatically measure all deferred tax at either 0% or 9%.
The expected tax treatment when a temporary difference reverses should be considered, including whether the relevant income or transaction is expected to qualify for the applicable Free Zone regime.
This makes accurate tax classification and financial forecasting particularly important.
Transitional Rules Under UAE Corporate Tax
The introduction of Corporate Tax also created transitional considerations for businesses entering the new tax regime.
For Corporate Tax purposes, the opening balance sheet is generally based on the closing balance sheet prepared for financial reporting purposes at the end of the financial year immediately preceding the first Corporate Tax period, subject to the applicable legislation and adjustments.
Certain assets and liabilities may therefore require specific consideration when determining their tax treatment at the beginning of the Corporate Tax regime.
Businesses should carefully review applicable transitional provisions because these adjustments can affect the relationship between accounting carrying amounts and tax bases.
When Can a Deferred Tax Asset Be Recognised?
A deductible temporary difference does not automatically result in a recognised deferred tax asset.
Under IAS 12, a DTA is generally recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences or unused tax losses can be utilised.
Businesses should therefore maintain reasonable support for significant DTA recognition decisions.
Relevant considerations may include:
- Forecast taxable profits
- Historical profitability
- Expected reversal of taxable temporary differences
- Tax-loss utilisation periods and restrictions
- Business forecasts
- Relevant tax planning opportunities
Where future taxable profits are uncertain, the recognised DTA may need to be reassessed.
Can Deferred Tax Assets and Liabilities Be Offset?
IAS 12 contains specific conditions for offsetting deferred tax assets and deferred tax liabilities.
Businesses cannot simply combine all DTA and DTL balances across different entities or tax jurisdictions.
The relevant balances generally need to relate to the same taxation authority and the same taxable entity, along with the applicable legal right and other IAS 12 requirements for offsetting.
The legal and tax structure of the business should therefore be considered before presenting deferred tax balances on a net basis.
UAE Domestic Minimum Top-Up Tax and Deferred Tax
The UAE introduced a Domestic Minimum Top-Up Tax (DMTT) for certain large multinational enterprise groups.
The DMTT applies for financial years beginning on or after 1 January 2025 to in-scope multinational enterprise groups meeting the relevant global revenue threshold, including the €750 million threshold under the applicable rules.
This regime is primarily relevant to qualifying multinational groups rather than ordinary UAE small and medium-sized businesses.
For businesses within its scope, the DMTT and Pillar Two rules can create additional considerations when calculating effective tax rates and assessing deferred tax.
Large multinational groups should therefore review their deferred tax positions together with the applicable DMTT requirements.
Simple Deferred Tax Example
Consider a UAE company with:
- Accounting carrying amount of an asset: AED 1,000,000
- Tax base of the asset: AED 800,000
- Temporary difference: AED 200,000
If the difference is determined to be a taxable temporary difference and the applicable deferred tax rate is 9%, the illustrative DTL would be:
AED 200,000 × 9% = AED 18,000
This is a simplified example. The actual calculation should consider the expected tax treatment when the difference reverses and the specific Corporate Tax position of the business.
Common Deferred Tax Mistakes
Businesses should avoid the following common mistakes:
Automatically Applying 9%
Not every business or temporary difference should automatically be measured at 9%.
Ignoring Free Zone Treatment
Free Zone businesses should assess whether their income qualifies for the applicable 0% Corporate Tax treatment.
Treating Every Accounting Difference as Deferred Tax
Only differences that meet the relevant IAS 12 requirements should be recognised as deferred tax.
Recognising DTA Without Sufficient Evidence
A future tax deduction does not automatically justify recognition of a DTA. The availability of future taxable profits must be assessed.
Ignoring Tax-Loss Restrictions
Tax losses may be subject to UAE Corporate Tax conditions and limitations. These need to be considered when assessing related deferred tax.
Overlooking Transitional Adjustments
Opening balances and transitional provisions can affect tax bases and should be reviewed carefully.
Using Outdated Information
UAE Corporate Tax legislation, Cabinet Decisions, Ministerial Decisions and FTA guidance can change. Businesses should use the latest applicable requirements when preparing their calculations.
How Businesses Can Manage Deferred Tax Effectively
A structured process can make deferred tax accounting easier to manage.
Businesses should:
- Prepare a schedule of relevant assets and liabilities.
- Determine the accounting carrying amount of each item.
- Identify the relevant tax base.
- Calculate and classify temporary differences.
- Determine the applicable tax rate expected when the differences reverse.
- Assess whether any DTA meets the IAS 12 recognition requirements.
- Review tax losses and other relevant tax attributes.
- Document significant assumptions and judgments.
- Reconcile deferred tax balances at each reporting date.
- Review relevant UAE Corporate Tax legislation and FTA guidance regularly.
Maintaining a clear deferred tax schedule can also make discussions with auditors and finance teams more efficient.
Frequently Asked Questions
What is a deferred tax asset in the UAE?
A deferred tax asset represents a future tax benefit arising from deductible temporary differences, unused tax losses or other qualifying items, subject to the applicable IAS 12 recognition requirements.
What is a deferred tax liability?
A deferred tax liability generally represents future tax consequences arising from taxable temporary differences between accounting carrying amounts and tax bases.
Is deferred tax the same as UAE Corporate Tax payable?
No. Current Corporate Tax relates to the tax payable or recoverable for a particular period, while deferred tax reflects future tax consequences under the applicable accounting framework.
Is 9% always used for UAE deferred tax?
No. The appropriate rate depends on the expected tax consequences when the temporary difference reverses and the company's applicable Corporate Tax position.
Can a UAE Free Zone company have deferred tax?
Yes. A Free Zone company can have deferred tax depending on its accounting carrying amounts, tax bases and expected Corporate Tax treatment.
Does a tax loss automatically create a deferred tax asset?
No. A DTA for tax losses is recognised only when the applicable IAS 12 requirements are satisfied, including the assessment of future taxable profits.
Does the UAE DMTT apply to every business?
No. The DMTT primarily applies to multinational enterprise groups meeting the applicable scope and revenue conditions.
Professional Accounting and Corporate Tax Support in the UAE
Deferred tax can become complex when a business has significant fixed assets, provisions, tax losses, revaluations, Free Zone activities or differences between accounting and tax treatment.
Parsh supports businesses in Dubai and across the UAE with accounting, bookkeeping and Corporate Tax-related services.
Our team can assist with financial reporting, Corporate Tax accounting, tax-related reconciliations and maintaining accurate accounting records.
If your business needs support with deferred tax calculations or understanding the accounting impact of UAE Corporate Tax, professional assistance can help you approach the process accurately and systematically.
Important Note
This article is provided for general informational purposes and should not be treated as legal, tax or accounting advice for a specific business. Deferred tax treatment depends on the applicable accounting framework, the company's tax position and the facts of each transaction. Businesses should refer to the latest UAE Corporate Tax legislation, FTA guidance and applicable accounting standards, or obtain professional advice where necessary.