A new tax regime in practice looks different than it does on paper
The UAE Federal Corporate Tax came into force for financial years starting on or after 1 June 2023. For most entities, the first full 12-month corporate tax year has now concluded, and the first tax returns are being filed.
The practical experience of working through that first cycle for UAE-based businesses and for CPA firms with UAE clients has revealed a set of compliance challenges that were not immediately apparent from the legislation and guidance. This article covers the most significant ones.
Transfer pricing documentation: the most underestimated obligation
The UAE Corporate Tax Law introduced transfer pricing requirements that align with OECD guidelines. Entities with related-party transactions are required to maintain documentation demonstrating that those transactions are priced on arm’s length terms.
In practice, many UAE businesses particularly those operating through freezone and onshore structures with related-party service or financing arrangements had not historically maintained transfer pricing documentation. The UAE’s former tax environment did not require it.
The documentation obligation now applies. Entities with related-party transaction values above the prescribed thresholds are required to maintain a Master File and Local File in accordance with the regulations. First-year compliance has revealed a significant gap between what the law requires and what most entities had in place.
For CPA firms with UAE clients, this is not a one-time catch-up exercise. It requires establishing documentation processes that can be maintained on an ongoing basis.
What to do: Review all related-party transactions for UAE entities including intercompany service fees, management charges, loans, and royalty arrangements. Assess documentation requirements. Establish arm’s length pricing benchmarking where it does not exist.
Freezone entity qualification: more complex than it appeared
The UAE Corporate Tax Law provides a 0% rate for Qualifying Freezone Persons entities incorporated in recognised freezones that derive Qualifying Income and meet the substance requirements.
The first full cycle has surfaced the complexity in determining what constitutes Qualifying Income and whether specific freezone entities meet the conditions. The Federal Tax Authority has issued guidance, but interpretation in practice has not always been straightforward, particularly for entities with mixed freezone and mainland activity.
Entities that assumed freezone status meant automatic 0% treatment need to verify that their specific income streams qualify, that they meet the substance conditions, and that their accounting separates qualifying and non-qualifying income correctly.
What to do: Do not assume freezone status equals 0% treatment. Assess each entity’s income streams against the Qualifying Income definition and verify substance compliance.
Deductibility questions on specific cost categories
The corporate tax legislation sets out limitations on the deductibility of certain costs — entertainment expenses, interest subject to the interest limitation rules, and certain payments to related parties that do not meet the arm’s length standard. In practice, these limitations have created questions around categorisation and documentation.
The most common issue we have seen is entertainment expenses that were previously fully expensed being subject to the 50% deductibility cap, and intercompany charges that lack arm’s length documentation being questioned.
What to do: Review the cost categories in your clients’ accounts for UAE entities. Identify expenses that fall into restricted categories. Ensure intercompany costs are documented.
Record-keeping requirements are stricter than many entities expected
The UAE Corporate Tax Law requires entities to maintain records for a minimum of seven years. This includes financial records, contracts, transfer pricing documentation, and the basis for positions taken in the tax return. For entities that have historically maintained minimal financial records a common pattern for certain freezone companies with simple structures the record-keeping requirements represent a genuine compliance uplift.
What to do: Assess record-keeping against the seven-year requirement. Identify gaps and implement document management processes that will support future audits.
The compliance baseline is now established the question is what comes next
The first filing cycle has established the baseline. Entities that completed their first return have a starting point. What comes next particularly for entities with related-party structures, freezone qualification questions, or complex cost bases is ensuring that the positions taken in that first return are defensible and that documentation is in place to support them.
