Corporate Tax UAE: The Year-Two
Mistakes First Filers Are Making
The second return is where first-year shortcuts start to show, and where
they are still cheap to fix.
The first corporate tax return was a learning exercise for most UAE businesses. Owners registered, gathered a year of accounts and filed through EmaraTax, often close to the deadline. The second cycle is different. The FTA now has a prior return to compare against, and shortcuts that seemed harmless in year one start to show.
Here are the year-two mistakes we see most often when reviewing files for corporate tax UAE compliance, and the fix for each.
Treating Small Business Relief as permanent
Small Business Relief lets a resident person with revenue of AED 3 million or less in a tax period be treated as having no taxable income for that period. It is an election made in the return, not an automatic status, and it is only available for tax periods ending on or before 31 December 2026.
Two problems follow. Some businesses that elected the relief in year one forget to elect it again. Others plan their 2027 budgets assuming it continues. Under the rules as they stand it does not, so a small company that has never computed taxable income should start preparing for the 9% rate on taxable income above AED 375,000.
Tax losses from a period in which the relief is elected also cannot be carried forward, which matters for a start-up expecting early losses.
Using losses without checking the conditions
Tax losses can be carried forward against future taxable income, but only up to 75% of the taxable income of a later period, and only while ownership continuity conditions are met. Losses can also be transferred between group companies that meet the common ownership test. Year two is where these rules first bite, because there is now a loss on record to use.
The fix is a short loss schedule kept with the return, showing where each loss came from, how much has been used and the ownership position at each year end.
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Related-party transactions with no paper trail
Payments to owners, directors and their relatives, and dealings between companies under common control, must reflect arm’s length or market value. In year one, many SMEs listed these transactions without supporting them. In year two the same figures reappear, and a reviewer can now see a pattern.
- Put a written agreement behind every recurring related-party charge, including management fees and shared rent.
- Benchmark owner salaries against what the role would pay an outsider.
- Make sure the disclosure in the return matches the financial statements line for line.
Records kept for filing, not for review
Under the corporate tax UAE regime, records must be kept for seven years after the end of the tax period. Several first-year files we have seen held the return and the trial balance but not the working papers that explained the adjustments: disallowed entertainment, depreciation differences, exempt dividends, reversed provisions.
When the FTA asks, the business has to rebuild that reasoning from memory.
A clean year-two file holds the financial statements, the tax computation, a reconciliation from accounting profit to taxable income, and the evidence behind each adjustment.
Year two is the cheaper year to fix things
Errors found before the second return is filed can usually be corrected through a voluntary disclosure for the earlier period and an accurate filing for the current one. Errors found by the FTA cost more, in penalties and in management time. A short review of the first return, done now, is one of the more cost-effective steps a business can take for corporate tax UAE compliance this year.
If you would like a second pair of eyes on last year’s file before the next deadline, TSAC’s team can review your first return and the records behind it as part of a free consultation.
