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UAE Corporate Tax compliance is no longer simply a matter of taking the accounting profit, applying 9%, and submitting a return.The UAE Corporate Tax return requires businesses to bridge the gap between accounting profit and taxable income. That bridge can involve realisation-basis elections, exempt income, related-party adjustments, interest limitation rules, tax losses, transfer pricing, free-zone rules and several specific disclosures.
The Federal Tax Authority (FTA) itself states that accounting profit must be adjusted for items such as unrealised gains and losses, exempt income, intra-group transfers, non-deductible expenses, Related Party and Connected Person transactions, tax losses and available tax incentives.Here are 10 advanced errors that can materially affect a Corporate Tax return.
1. Applying the Realisation Basis Without Understanding the Election
One of the more sophisticated errors is treating the realisation basis as simply an adjustment for fair-value gains. An accrual-basis taxpayer may elect to recognise gains and losses on a realisation basis. However, the election can have a much broader impact depending on whether it applies to all assets and liabilities or only assets and liabilities held on capital
account.
The mistake is making the adjustment without first determining:
- Whether a valid election was made;
- Which category of assets and liabilities the election covers;
- Whether the item is held on capital or revenue account; and
- Whether the accounting movement has actually been recognised in the income statement.The FTA specifically notes that unrealised gains and losses can be treated differently depending on the realisation-basis election.
How to avoid it: Document the realisation-basis election and prepare a reconciliation of all relevant unrealised accounting movements before completing the return.
2. Making a Realisation-Basis Adjustment for an Amount That Was Never in Accounting Income
The Corporate Tax return contains specific questions concerning gains and losses recognised in the financial statements that will not subsequently be recognised in the income statement.
However, where a taxpayer has elected for realisation basis, an unrealised gain or loss that is recognised directly in the financial statements but has not already been recognised in accounting income should not automatically be treated as a further adjustment to accounting income.
How to avoid it: Trace every tax adjustment back to the financial statements. Do not create a tax adjustment merely because an unrealised accounting movement exists.
3. Treating All Dividends as Exempt Without Testing the Participation Exemption
“Dividend income = exempt” is not always an adequate tax analysis.
UAE dividends from UAE juridical persons are generally exempt, while foreign dividends and other income relating to a foreign participation may require the conditions of the Participation Exemption to be satisfied. The analysis may involve ownership percentage, holding period and other statutory conditions.
The exemption also affects the treatment of related expenditure. Expenditure incurred in deriving exempt income is generally not deductible, subject to specific rules.
How to avoid it: Maintain a schedule showing ownership, acquisition date, holding period, income received and the applicable exemption conditions.
4. Applying the 30% EBITDA Interest Limitation Without First Determining Whether It Applies
The general interest limitation rules do not apply identically to every taxpayer. Thresholds, exclusions and the definition of relevant net interest expenditure must be considered before performing the calculation. Even where an amount is restricted, the treatment of the disallowed amount and subsequent utilisation must be tracked.
How to avoid it: Prepare a dedicated interest limitation schedule rather than making a blanket percentage adjustment to finance costs.
5. Losing Track of Carried-Forward Interest
A company may correctly calculate a disallowed interest amount in Year 1 but fail to track it for subsequent years. This creates the opposite problem: the taxpayer may permanently lose a deduction that could potentially be utilised in a later period. The UAE rules provide for carry-forward of certain disallowed net interest expenditure.
How to avoid it: Maintain a year-by-year interest limitation roll-forward showing opening balance, current-year restriction, utilisation and closing balance.
6. Claiming Foreign Tax Credits Without Performing a Source-by-Source Calculation
Foreign income does not automatically become exempt from UAE Corporate Tax. Where foreign income is taxable in the UAE, foreign tax paid may potentially be available as a foreign tax credit subject to the applicable rules.
A common mistake is deducting foreign withholding tax as an expense instead of analysing whether a foreign tax credit is available.
How to avoid it: Maintain a country-by-country foreign income and foreign tax schedule, including gross income, foreign tax paid, treaty position and UAE tax attributable to that income.
7. Selecting the Wrong Accounting Basis in the Return
The accounting basis disclosed in the Corporate Tax return is not a cosmetic field. The tax treatment can depend on whether the financial statements are prepared on an accrual basis or cash basis, and certain elections and adjustments interact directly with the accounting basis. The return itself requires disclosure of the accounting principles applied.
How to avoid it: Confirm the accounting basis from the final financial statements and accounting policy notes not from the bookkeeping software settings alone.
8. Using Tax Losses Without Checking the Utilisation Limitation
Even where a company has carried-forward tax losses, it does not necessarily mean that the entire balance can be deducted against current-year taxable income.
Under the UAE Corporate Tax regime, the utilisation of carried-forward tax losses is generally limited to 75% of the taxable income for the relevant tax period, subject to the applicable conditions. This means at least 25% of taxable income remains taxable before considering any other applicable adjustments or reliefs. Tax-loss utilisation is subject to statutory conditions and limitations.
How to avoid it: Prepare a tax-loss utilisation schedule for every tax period and reconcile opening losses, current-year losses, utilisation and closing losses.
9. Treating Every Related-Party Transaction as a Simple Accounting Balance
A related-party balance in the trial balance is not merely an accounting disclosure issue. Corporate Tax requires consideration of transactions with Related Parties and Connected Persons, including whether the pricing and conditions comply with the applicable transfer pricing requirements.
The rules apply to domestic as well as cross-border transactions.
How to avoid it: Reconcile the related-party note, general ledger, transfer pricing data and Corporate Tax return schedules before submission.
10. Treating Transfer Pricing as Only a Year-End Documentation Exercise
A common advanced-level mistake is waiting until the Corporate Tax return deadline to consider transfer pricing. By then, the transactions have already occurred. Transfer pricing should be considered when determining whether related-party charges, management fees, financing, royalties or other transactions were entered into on an appropriate basis.
How to avoid it: Perform a related-party transaction review during the year and not merely when preparing the Corporate Tax return.
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