Step-by-Step Guide to UAE Corporate Tax Returns

Navigating the UAE Corporate Tax Return: A Step-by-Step Guide

Filing the first UAE Corporate Tax (CT) return is a significant undertaking for businesses and professionals alike. It marks a new era in the UAE’s tax landscape and demands careful attention and preparation. This blog post, outlines the key steps and critical considerations involved in simplifying the CT return filing process.

The CT return filing is managed through Federal Tax Authority (FTA) portal and is structured into several parts. Understanding these sections and the underlying requirements is crucial for accurate and compliant filing.

The Seven Parts of the CT Return

The UAE CT return is typically divided into seven main parts:

1. Taxpayer Details: This is the initial section where basic information about the taxable person is provided.

2. Elections: This is a critical part requiring careful decision-making. Taxpayers have various options to elect for specific treatments, some of which may be one-time and irrevocable. Key elections discussed include:

Realization Basis: An option for taxable persons preparing financial statements on an accrual basis. This election allows for unrealized gains or losses on assets and liabilities subject to fair value or impairment accounting (often reported in Other Comprehensive Income – OCI) to be taxed only when realised, rather than when they arise. It’s a one-time, irrevocable choice in the first tax return. Taxpayers can choose this for all relevant assets/liabilities or only those under the capital account. Ministerial Decision 134 provides details on how this applies, particularly concerning gains/losses in OCI and P&L.
Transition Rules (Article 120): Allows adjustments for gains or losses on certain assets (like immovable property, intangible assets, financial assets/liabilities) owned prior to the first tax period, ensuring that only gains/losses attributable to the post-tax period are subject to CT. This election is also one-time.
Small Business Relief: An annual election available under specific conditions, typically for businesses with revenue below a certain threshold. Opting for this simplifies the return but may impact the ability to carry forward losses. It is available for the first three years, up to financial years ending on or before 31 December 2026.
Exemption for Permanent Establishment (PE): An annual election related to PE exemptions.
Transfers within a Qualifying Group: Options related to tax treatment for transfers between qualifying group entities.
Business Restructuring Relief: Relief available for business restructuring, depending on when the transfer happens.

Making these elections requires careful evaluation as they have long-term implications. The portal presents these options in the second part of the return.

3.Taxable Income Computation: This section involves calculating the taxable income. It starts with the accounting income (net profit) and includes adjustments as per the CT law, such as those related to unrealized gains/losses if the realization basis is not chosen.

4.Reliefs and Schedules: This section incorporates various reliefs and requires filling out specific schedules.

5.Tax Credits: This section deals with foreign tax credits, which can be complex to calculate, requiring the determination of net foreign income linked to expenditures.

6.Tax Payable: The portal automates the calculation of the tax liability based on the figures entered.

7.Submission: The final step is submitting the return.

Key Schedules and Areas of Focus

While all parts are important, certain schedules and areas require particular attention due to their complexity and the data required:

Elections Schedules: As mentioned above, schedules related to Realization Basis and Transition Rules require specific details and calculations, especially concerning unrealized gains/losses and pre-tax period assets.
Transfer Pricing (TP) Disclosure Form/Schedules: This is integrated into the return portal.
- It is triggered if the aggregate value of Related Party (RP) transactions exceeds 40 million AED or if aggregate Connected Person payments exceed 500,000 AED.
- Even if below these thresholds, documentation and justification for arms length pricing must be maintained.
- The form requires reporting details for each related party and transaction type (e.g., goods, services, loans).
- You need to specify the TP method used, the arms length value, and any required tax adjustment.
- The onus is entirely on the taxpayer to ensure transactions are at arms length and to report any necessary adjustments. Benchmarking analysis is crucial for this.
- Payments to Connected Persons are a unique aspect in UAE CT, requiring justification of arms length terms, potentially using HR firm reports or Transactional Net Margin Method (TNM).
Free Zone Reporting: This section is complex and requires detailed information to determine Qualifying Free Zone Person (QFZP) status.
- The return asks whether the entity is incorporated/established in a free zone.
- It then asks if the person meets the requirements of a QFZP. This involves confirming:
  - Adequate substance in the UAE (assets, qualified employees, operating expenditure).
  - Deriving qualifying income.
  - Not electing for normal corporate tax.
  - Meeting other ministerial conditions, including the de minimis test (non-qualifying revenue not exceeding 5% of total revenue or 5 million AED, whichever is lower) and having audited financials.
- The return requires reporting total revenue and revenue from specific categories like domestic or foreign permanent establishments, transactions with non-free zone persons related to commercial property in the free zone, intellectual property income, and excluded activities.
- Detailed information on employees, operating expenditure, and capital expenditure related to qualifying income is also required.
- The portal calculates the qualifying income based on reported expenditure and uplift expenditure for certain activities like Intellectual Property.
- Crucially, revenue and expenditures should be reported gross, not netted off, for accurate de minimis and qualifying income calculations.

Preparing for Filing

Successfully navigating the CT return requires significant preparation well before the deadline:

Gather Data: Compile all necessary financial data, transaction details (especially for related and connected parties), and documentation supporting substance and arms length pricing.
Perform Analysis: Conduct benchmarking for related party transactions and connected person payments. Determine if any adjustments are needed to meet arms length principles.
Evaluate Elections: Carefully consider the implications of available elections, particularly the Realization Basis and Transition Rules, as some are irrevocable.
Ensure Compliance for Specific Regimes: If operating in a Free Zone, meticulously check compliance with QFZP requirements, including substance, qualifying income, and the de minimis test. Obtain audited financials if required.
Review Financials: Ensure your accounting records are robust and support the figures reported in the return. Pay attention to items like provisions and their tax treatment. Ensure revenue and expenditures are grossed up where necessary for Free Zone reporting.
Understand the Portal: Familiarise yourself with the CT return portal, which is designed as a Q&A interface where your responses trigger subsequent sections and schedules.

Final Thoughts

Filing the UAE CT return requires diligence and a thorough understanding of the law and related ministerial decisions. The first filing may involve extra effort in data gathering and analysis. However, by approaching the process methodically, understanding the key requirements for each section, and making informed choices regarding elections and reporting, businesses can ensure they “file it right” and maintain their reputation in the evolving tax landscape. While the portal automates calculations, the accuracy of the return depends entirely on the accuracy of the data and choices provided by the taxpayer.