Key Financial Considerations in a Liquidation Audit (Dubai & UAE)

In the UAE, liquidation audit is an important process that makes sure that business pays off its outstanding obligations prior to closing business. The most important aim of audit is to make sure that business is compliant of UAE laws, including laws of labor, taxation, banking, and regulation laws. With reference only to confirmed UAE laws and rules, key financial issues to keep in mind while conducting liquidation audit are mentioned below.

Prior to liquidation, business is required to pay off its outstanding obligations to creditors, the government, and its service suppliers. It involves procurement of No Objection Certificate (NOCs) of key vendors and clearance of outstanding supplier obligations. The business is also required to procure its bank’s ‘No Liability Certificate’ and clear bank loans, overdraft, and credit card outstanding amounts. This business is also required to pay off outstanding obligations to the government, including road penalties, municipal penalties, free zone penalties, Dubai Economic Department (DED) renewal of license amounts, and others.

The business is also required to pay off its outstanding rentals. While free zone business requires clearance by free zone authority, mainland business requires clearance by its landlord. Apart from clearance by DEWA, Etisalat, or Du, outstanding amounts of its utility bills need to be cleared.

The business is required to clear its outstanding obligations by norms of DED and free zone authority, or face legal actions or delay of liquidation process.

Before business liquidation, employees’ obligations need to be discharged, according to UAE labour law. Final wage, end-of-service gratuity, and refund of unused annual leave are part of employees’ obligations.

Employees of one or more years of service are covered by UAE Labour Law No. 33 of 2021 to make settlements of gratuity. The settlements are calculated on the basis of 21 days of basic wage each year of service up to fifth year of service, and 30 days of basic wage each year of service after fifth year of service. The Ministry of Human Resources and Emiratization mandates that final wage of mainland employees is settled through Wage Protection System (WPS).

Besides, employees’ visa and work permit need to be cancelled by company through MOHRE on behalf of mainland employees or respective free zone authority on behalf of free zone employees. A Labour Clearance Certificate, part of licence cancellation documentation, will be obtained by company from MOHRE upon clearance of outstanding obligations. Employees’ claims and interruption of business liquidation can occur due to non-payment of employees’ benefits.

Before business is liquidated, it has to pay its obligations to Federal Tax Authority (FTA) if business is VAT-registered. Business has to pay outstanding amount of VAT and file its final VAT report. FTA deregistration is to be filed within 20 business days of closing date to avoid penalty by FTA. Aended regulations of FTA Decision No. 7 of 2021 says that delay will result in AED 1,000 for the first month, with an additional AED 1,000 per month for each month of delay, up to a maximum of AED 10,000.

The business also has to pay outstanding dues if subject to Federal Decree-Law No. 47 of 2022 and submit its final corporate tax return. After fulfilling these conditions, business is required to obtain Tax Clearance Certificate from FTA that confirms no outstanding tax dues are there. Non-fulfillment of these conditions will incur penalties along with a delay of the final cancellation of license.

The business will repay its outstanding amounts to its bank and close its corporate accounts. All bank loans, overdraft facilities, and credit card amounts need to be paid off. Banks are required by UAE Central Bank rules to provide a ‘Bank Closure Certificate’ after closing its accounts.

The business will have to clear all cheques that have been drawn, including post-dated cheques, on closing of the account. The bank guarantees or letters of credit also have to be cancelled or settled.

In line with UAE Commercial Companies Law No. 32 of 2021 and the company’s Memorandum of Association (MOA), there is an obligation on the company to liquidate its residual assets and distribute proceeds. The sale of goods, equipment, and assets is to be implemented, where liquidation proceeds are to pay off outstanding obligations first. The residual funds are to be distributed to shareholders.

Shareholders should approve resolutions of receiving share confirmation, and transactions duly entered into should also be cancelled, along with legal agreements of third-party agreements and power of attorney that is linked to business.

A final audited financial report may be required, particularly by free zones like DMCC, JAFZA, or DAFZA. The audit is to be conducted by a licensed audit company, ensuring that all liabilities have been discharged and assets have been liquidated. The audit report is to be filed with the free zone authority or DED.

Additionally, a final liquidation report of overall liquidation process, final settlement of liabilities, disposal of assets, and closing of accounts will need to be prepared and filed with respective authorities. Documentation is important to ensure final clearance is awarded.

The last part is obtaining clearance certificates from respective authority:

• MOHRE Clearance Certificate: confirms clearance of employees’ liabilities
• FTA Tax Clearance Certificate: Shows clearance of corporate tax and VAT liabilities.
• Bank Closing Certificate: Received by corporate bank of company
• DED or Free Zone Clearance by Free Zone Authority: Clears penalties, charges, and arrears.

Once all certificates have been obtained, company can submit final license cancellation request to DED (in case of mainland or respective free zone authority). After clearance, Company Liquidation Certificate is issued, marking business closing.

Non-compliance during liquidation can have severe consequences. The FTA can postpone liquidation if there is outstanding employees’ dues. The FTA can also impose penalties on deregistration of VAT that is overdue. Non-payment of bank loans or dishonored cheques can have legal and criminal consequences. Directors and shareholders can also face restrictions on traveling, visa restrictions, and blacklisting, precluding business activities in the future.

A liquidation audit is a detailed financial audit that requires strict compliance with UAE laws. Companies must cautiously fulfill financial obligations ranging from settlements of obligations of debts and employees to bank closing and taxation filings. Timely submission of audit reports and clearance certificates along with keeping precise records, is important to ensure that liquidation is efficiently executed and within law.

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