Understanding UAE accounting currency standards is critical for businesses operating in the UAE, whether you’re a startup or a multinational enterprise. Under UAE accounting standards and IFRS regulations, companies must maintain their books in a functional currency (typically AED) while potentially reporting in a presentation currency. This guide explores the laws, regulations, and practical considerations around choosing the right currency for your UAE accounting—from VAT compliance requirements to corporate tax mandates to parent entity consolidation needs. Whether you’re maintaining a single-currency operation or managing multi-currency transactions, the decisions you make about functional currency directly impact your VAT filings, corporate tax calculations, and consolidated financial statements.
Understanding Functional Currency Under IAS 21
One of the most important yet overlooked concepts in UAE accounting is the distinction between functional currency and presentation currency—terms defined in the International Financial Reporting Standards (IFRS) Standard IAS 21: “The Effects of Changes in Foreign Exchange Rates.”
What is Functional Currency?
Your functional currency is the currency of the primary economic environment in which your business operates. It’s where you keep your books, measure your assets and liabilities, and record your income and expenses. For most UAE businesses, this is the UAE Dirham (AED). However, some multinational subsidiaries might use USD or another currency depending on their operational reality.
Key takeaway: The functional currency isn’t always obvious, and choosing incorrectly can create compliance headaches and accounting errors.
Primary Factors for Determining Functional Currency
1. Currency of transactions: In which currency do you predominantly buy and sell?
2. Currency of financing: In which currency do you borrow or receive investments?
3. Currency of operations: Which currency drives your day-to-day business activities?
For example, a USA-based parent company with a UAE subsidiary might think “we operate in UAE, so use AED.” However, if the subsidiary’s revenue comes from US contracts billed in USD, and its expenses are paid in USD, the functional currency might actually be USD under IAS 21 guidance.
Presentation Currency vs. Functional Currency
Key difference: Your functional currency is where you keep records; your presentation currency is how you report to stakeholders.
– Functional currency example: You maintain all books in AED (required for UAE VAT/CT)
– Presentation currency example: You convert AED to USD for the American parent company
– Technical term: This conversion is called “presentation currency translation”
This flexibility allows UAE businesses to comply with local regulations (AED for VAT/CT) while providing parent entities with reports in their preferred currency.
Factors Influencing the Choice of Currency
Banking Transactions
The majority of banks allow businesses to maintain bank accounts in multiple currencies. However, for the majority of businesses in the UAE, the functional currency will be AED due to its widespread use. Therefore, if your business engages in transactions in other currencies (such as USD, GBP, or Euros), you could maintain bank accounts in such currencies as well.
In addition, entities using more than one currency frequently should 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.
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.
Important implication: You must perform currency translation on a transaction-by-transaction basis using Central Bank of UAE official exchange rates.
Free Zone & ADGM-Specific Accounting Currency Requirements
UAE free zones have unique currency rules that differ from mainland requirements. This creates additional complexity if your business operates in ADGM, JAFZA, RAK, or other zones.
Abu Dhabi Global Market (ADGM)
The ADGM is one of the few UAE regulators with a strict currency mandate:
Requirement: Financial statements MUST be submitted in USD (or other ADGM-approved currencies, but USD is the standard)
Important implication: Even though UAE corporate tax law requires AED reporting, ADGM-registered entities must report in USD to the authority. This means you need dual compliance.
Solution strategy: Most ADGM entities maintain books in AED initially (for UAE VAT/CT compliance), then convert quarterly reports to USD for ADGM submission using Central Bank official exchange rates.
Why this matters: Failure to report in the required currency can result in penalties up to AED 1,000,000 for non-compliance with regulatory requirements.
Other Free Zones
– RAK Free Zone: Typically AED, but accepts USD for international companies
– JAFZA (Dubai): AED compliance for VAT/CT, but international entities can request USD approval
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.
Stakeholder Requirements
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.
Final Recommendation: The Optimal Currency Strategy for UAE Businesses
✅ Best Practice: Maintain Books in AED
The best practice we’ve observed across hundreds of UAE businesses is this: Maintain your books in AED as your functional currency (required for VAT compliance, corporate tax, and Central Bank adherence). This ensures you meet quarterly VAT filing requirements and annual corporate tax deadlines without complications.
💱 Understanding USD Exchange Rate Pegging
This strategy works seamlessly when the secondary currency is USD, as the USD rate is pegged at 3.6725. You can easily convert AED statements to USD at this fixed rate for parent entities or foreign stakeholders.
📊 Advanced Option: Dual Currency Maintenance
For other currencies (EUR, GBP, CHF, etc.), businesses maintain separate books to provide converted financials. This approach requires more complex accounting but ensures multi-currency accuracy.
🎯 Ready to Optimize Your Setup?
Currency accounting in the UAE can feel confusing. You must navigate VAT law, corporate tax regulations, IFRS standards, and free zone requirements simultaneously. This complexity creates the need for clarity.
If your business isn’t sure about functional vs. presentation currencies, or if you’re facing auditor questions about exchange rate calculations, our team of UAE accounting experts can help.
[Get Your Accounting Currency Audit]
We’ll review your current setup, identify compliance gaps, and show you exactly how to structure your books for AED reporting while meeting all regulatory requirements.
