Which Currency is Compliant for UAE Accounting Standards?
The UAE, a hub for budding entrepreneurs and multinational companies, is known for its business-friendly environment. While the United Arab Emirates dirham (AED) is the official currency of Dubai and the entire UAE, due to several factors, such as the requirement of reporting the financials in the currency of the parent entity, the requirement of submission of financials in a different currency by the freezone authority could be confusing. In our blog today, we are exploring the laws and regulations around the currency to be used while accounting in the UAE.
Factors influencing the choice of currency:
Banking transactions:
The majority of banks allow businesses to maintain bank accounts in multiple currencies. For the majority of businesses in the UAE, the functional currency will be AED due to its widespread use. However, if the business engages in transactions in other currencies (such as USD, GBP, or Euros), they could maintain bank accounts in such currencies as well.
Entities using more than one currency frequently could consider using financial instruments to hedge against exchange fluctuations. This can protect profits from financial uncertainty.
Statutory Laws around the currency:
VAT Law:
- VAT law does not restrict the business from using a currency other than dirham (AED). However, the amount stated in the tax invoice must be converted to AED along with the exchange rate used.
- If an invoice is drawn without converting the currency to AED, then the customers will not be able to claim input of the VAT as it shall not be treated as a tax invoice.
Also refer our useful article on – What is VAT? A Value Added Explainer for UAE Taxation
Corporate Tax Law:
- Corporate tax law requires that a taxable person’s income, deductions, and credits be measured in UAE dirhams. Income and expenses derived in a foreign currency need to be translated into AED.
Take a glance on – Companies Who are Required to Pay Corporate Tax in UAE
Parent entity considerations:
For subsidiaries, branches, or multi-national companies operating in the UAE, the currency used by the parent entity may influence the choice of currency. For easy and accurate consolidation, the UAE business may have to align their currency with that of the parent entity.
Stake-holders requirement:
The preferences of the stakeholders may also have to be considered while choosing the currency. If the investor or lender chooses to have the report in foreign currency, alternative measures must be taken to make the financials available for them.
Regulatory authority:
The regulatory authorities require the submission of financials very frequently. For instance, Abu Dhabi Global Market (ADGM) requires the submission of financials denominated in USD. Such requirements will define the choice of currency.
Final Note:
Now, with all the above statutory requirements, one might be confused about the currency to be used while maintaining the books of accounts.
In our extensive experience, we have seen that it is beneficial for the business to maintain the books of accounts in AED as the requirements of VAT law, which is to be filed quarterly, and corporate laws are taken care of. When it comes to the requirements of parent entities, stakeholder groups, or regulatory authorities, the business may choose to draw the financials in the currency simply by converting the AED to such a currency. This will work when the secondary currency is USD, as the USD rate is pegged at 3.6725. However, if any other currency is to be used, then the business may maintain a separate set of books to effectively provide the converted financials.
We understand the confusion and hurdles a business face in situations like the one described above. We, at BCL Globiz, provide tailor-made processes and systems while maintaining the books of account. For further information, connect with our experts at Punith@bclglobiz.com.
