UAE Corporate Tax Filing: 7 Mistakes That Cost Companies Money

The first UAE corporate tax filing season is behind us. The second is approaching. And the FTA is no longer in education mode.

The Federal Tax Authority processed its first wave of corporate tax returns in 2025 and is now scaling up enforcement. Audit capacity increased 135% in 2024, powered by digital cross-referencing tools that match corporate tax returns against VAT filings, customs records, and financial statements. Cabinet Decision No. 129 of 2025 overhauled the penalty framework effective 14 April 2026, making the consequences of errors both clearer and — in some cases — steeper. We covered the broader regulatory shifts in our guide to UAE tax changes taking effect in 2026.

We advise businesses across the UAE on corporate structuring and regulatory compliance, and the same filing mistakes keep appearing. Most are preventable. Here are the seven that cause the most damage.

1. Assuming free zone status means no filing obligation

This is the most expensive misconception in UAE corporate tax. Free zone companies that qualify as a Qualifying Free Zone Person (QFZP) benefit from a 0% rate on qualifying income — but they must still register with the FTA, file an annual corporate tax return, and from 2025 onward, submit audited financial statements. Our UAE free zones setup guide covers the compliance obligations for each zone type in detail.

Failing to register triggers an AED 10,000 late registration penalty. The FTA introduced a one-time waiver for businesses that file their first return within seven months of the end of their first tax period, but this window is closing. For companies with a financial year ending 31 December 2025, the waiver deadline is 31 July 2026. Miss it, and the penalty stands.

The deeper risk is structural: a free zone entity that does not file cannot demonstrate QFZP compliance. If the FTA later determines the entity failed to meet the conditions — even retroactively — the company loses its 0% rate for the current year and the following four tax years, with all income taxed at 9%.

The filing obligation applies regardless of whether tax is payable. A nil return is still a return.

2. Getting the qualifying income split wrong

For QFZPs, the distinction between qualifying and non-qualifying income determines everything. Qualifying income — broadly, revenue from transactions with other free zone persons or from qualifying activities with non-free zone persons — is taxed at 0%. Non-qualifying income is taxed at 9%.

The trap is the de minimis threshold. If non-qualifying revenue exceeds the lower of 5% of total revenue or AED 5 million, the company loses QFZP status entirely. Not just on the excess — on all income, for five years.

We see companies misclassify income in three common ways. First, they treat revenue from mainland customers as qualifying without confirming the activity falls within the approved list under Ministerial Decision No. 265 of 2023 (now updated by Ministerial Decision No. 229 of 2025). Second, they fail to verify whether the counterparty in a free-zone-to-free-zone transaction is the "beneficial recipient" of the goods or services, as required by Cabinet Decision No. 100 of 2023. Third, they ignore ancillary income streams — bank interest, rental income from non-free-zone property, insurance recoveries — that may push them past the threshold. This last point is particularly relevant for family offices structured in DIFC that hold mixed asset portfolios generating both qualifying and non-qualifying returns.

The fix is granular revenue mapping. Every income stream must be classified against the current qualifying activities list, tested against the de minimis cap monthly, and documented with sufficient evidence to survive an FTA review. For DIFC-based businesses, this intersects with DFSA reporting obligations and AML compliance requirements that demand a similarly rigorous paper trail. If your finance team cannot produce this analysis on demand, the classification is likely wrong.

3. Treating corporate tax and VAT as separate exercises

The FTA's audit infrastructure was built for VAT. It now extends to corporate tax. Both taxes share the same procedural law — Federal Decree-Law No. 28 of 2022 — which means audit notices, evidence requests, and penalty calculations follow identical procedures.

More importantly, the FTA cross-references corporate tax returns with VAT filings, customs declarations, and bank records. A business that reports AED 10 million in revenue on its corporate tax return but AED 12 million in output VAT supplies will trigger an automatic flag. So will discrepancies in employee headcount between corporate tax deductions and WPS (Wage Protection System) records. For financial services firms and fintech companies operating under DFSA or CBUAE oversight, these inconsistencies can also attract regulatory attention beyond the FTA.

The companies that handle this well reconcile their tax positions before filing. Corporate tax returns should be built from the same underlying data as VAT returns, with documented adjustments for differences in timing, recognition, and scope. Treating the two as independent compliance tasks — often prepared by different teams or advisors — is how inconsistencies enter the system.

The amended Tax Procedures Law that took effect on 1 January 2026 expands the FTA's powers to request information and conduct inspections, making this alignment more urgent.

4. Claiming deductions the law does not allow

The UAE corporate tax law permits deductions for expenses incurred wholly and exclusively for business purposes. But several categories are explicitly excluded, and companies frequently claim them anyway.

Non-deductible items include fines and penalties imposed by UAE authorities, donations to non-qualifying entities, entertainment expenses beyond the prescribed limits, personal expenditure of shareholders or owners, and — critically — expenses not supported by adequate documentation.

The documentation requirement is the practical problem. The FTA expects businesses to maintain records for at least seven years, with invoices, contracts, and payment evidence linked to each claimed deduction. A deduction without a paper trail is a deduction the FTA will disallow, and the resulting adjustment triggers an understatement penalty of 1% per month on the additional tax due.

Related-party transactions carry additional scrutiny. Where payments flow between connected entities — management fees, royalties, intercompany service charges — the FTA requires arm's length pricing supported by transfer pricing documentation. Companies with revenue exceeding AED 200 million, or those that are part of a multinational group with consolidated revenue above AED 3.15 billion, must prepare both a Local File and a Master File. Even below these thresholds, the arm's length principle applies, and the FTA can request supporting analysis. Businesses subject to ESG reporting obligations face a compounding documentation burden — another reason to centralise compliance early.

Our transfer pricing documentation guide explains the current filing requirements and practical steps.

5. Missing the small business relief conditions

Article 21 of the Corporate Tax Law provides temporary relief for small businesses: UAE tax residents with annual revenue of AED 3 million or less can elect to be treated as having no taxable income. This relief runs until 31 December 2026, making it relevant for two more filing cycles.

The mistakes here are twofold. First, some businesses assume the relief is automatic. It is not — it requires an active election on the tax return. Second, some businesses that should not claim the relief are claiming it anyway.

Small business relief is unavailable to QFZPs and to members of a multinational enterprise group. It also carries a hidden cost: electing the relief disapplies the provisions for tax losses, exempt income, and certain deductions. A company with AED 2.8 million in revenue and AED 500,000 in losses may be better off forgoing the relief and carrying those losses forward to offset future profits.

The calculation is case-specific. The default assumption that "small means simple" does not hold under this regime.

6. Filing late and underestimating the cost

Corporate tax returns must be filed within nine months of the financial year-end. For calendar-year companies with a year ending 31 December 2025, the deadline is 30 September 2026. Payment is due on the same date.

Under the current penalty framework, late filing attracts AED 500 for the first offence and AED 1,000 for repeat offences in subsequent periods. These amounts seem manageable until you add the late payment penalty: 14% annual interest on the outstanding tax, calculated daily from the day after the deadline.

A company with AED 500,000 in unpaid corporate tax that files and pays three months late faces roughly AED 17,500 in interest alone — on top of the filing penalty and any understatement adjustments. There is no cap on the interest charge. It continues accruing until full payment.

The revised penalty regime under Cabinet Decision No. 129 of 2025, effective from 14 April 2026, adjusts several penalty categories and introduces proportional monthly charges for voluntary disclosures. The new framework rewards early self-correction — a voluntary disclosure filed before an FTA audit notice is significantly cheaper than one filed after. But the core message remains: late is expensive, and compounding interest makes it more expensive every day.

7. Not aligning corporate structure with tax position

This is the strategic mistake that sits beneath the filing errors. Many UAE businesses were structured during the pre-tax era, when the choice between mainland, free zone, or offshore was driven by ownership flexibility, visa allocation, or prestige — not tax efficiency. Our guide to foreign ownership rules and the comparison of LLCs versus sole establishments were written in that context — but tax is now a primary variable in every structuring decision.

Corporate tax has changed that calculus. A company structured as a QFZP but generating significant mainland revenue may be better off under the standard regime, where it can access the AED 375,000 threshold and claim small business relief. A group with multiple entities across different free zones may benefit from restructuring to enable tax grouping — which is available to mainland entities and non-QFZPs but not to QFZPs.

We regularly work with businesses that need to reassess their corporate structure in light of the tax regime. The question is no longer just "where should we be licensed?" but "how does our entity structure interact with our tax obligations, our transfer pricing, and our commercial arrangements?"

For businesses operating across multiple free zones or considering a DIFC setup, this structural alignment is now a prerequisite, not an afterthought. The same applies to holding company structures and businesses evaluating Abu Dhabi free zones — the tax treatment varies materially depending on how the group is organised.

What to do before your next filing

The practical steps are straightforward, even if the underlying analysis is not:

Confirm your registration status. If your business is not yet registered with the FTA — including free zone entities with no taxable income — register immediately. The penalty waiver window is narrowing. If you are still in the process of registering a new company in Dubai, build FTA registration into the setup timeline from the start.

Map every revenue stream. For QFZPs, classify each income line against the current qualifying activities list (Ministerial Decision No. 229 of 2025) and test the de minimis threshold. Document your analysis.

Reconcile corporate tax with VAT. Before filing, compare revenue, expense, and payroll figures across both returns. Identify and document every variance.

Review your deductions. Confirm that every claimed expense is supported by invoices, contracts, or other evidence. Flag related-party payments and confirm arm's length pricing.

Run the small business relief calculation. If eligible, model both scenarios — with and without the election — before deciding.

Check your structure. If your corporate structure predates the tax regime, assess whether it still serves your commercial and tax objectives. The 2025 Commercial Companies Law amendments introduced new tools for LLCs — including share classes and drag-along rights — that may enable more tax-efficient group arrangements. The cost of restructuring is typically far less than the cost of operating under an inefficient structure for years.

If your business needs advice on corporate tax compliance or structuring, contact our Corporate & Commercial Law team. For new businesses, our business formation and incorporation services include tax-aligned structuring from day one.

This article is published by Kayrouz & Associates for general information purposes. It does not constitute legal advice and should not be relied upon as such. For advice on your specific circumstances, please contact our team.

FAQ

When is the UAE corporate tax filing deadline?Corporate tax returns must be filed within nine months of the financial year-end. For companies with a December year-end, the deadline for the 2025 tax period is 30 September 2026. The same deadline applies to payment of any tax due.

Do free zone companies need to file corporate tax returns?Yes. All free zone entities must register with the FTA and file annual corporate tax returns, even if they qualify for the 0% rate as a QFZP. Failure to file risks both penalties and loss of QFZP status.

What happens if a QFZP breaches the de minimis threshold?If non-qualifying revenue exceeds the lower of 5% of total revenue or AED 5 million, the entity loses QFZP status for the current tax year and the next four years. All income becomes subject to the 9% rate.

What are the penalties for late corporate tax filing in the UAE?Late filing incurs AED 500 for a first offence and AED 1,000 for subsequent periods. Late payment attracts 14% annual interest on the outstanding amount, with no cap. Under the revised penalty framework effective April 2026, voluntary disclosures filed before an FTA audit notice carry reduced charges.

Can small businesses avoid corporate tax entirely?Businesses with annual revenue of AED 3 million or less can elect for small business relief, which treats them as having no taxable income. This relief is temporary (until 31 December 2026) and unavailable to QFZPs or members of multinational groups. The election must be made actively on the tax return.

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