Since UAE corporate tax took effect, your statutory audit covers corporate tax too. Your auditor now checks three things: the corporate tax you owe for the year, any deferred tax under IAS 12, and whether your notes explain both. If any of the three is materially wrong or missing and management does not correct it, the audit takes longer and the report can be modified. Where audited accounts are required for corporate tax, the return is prepared from them, so a late audit puts the return at risk.
This guide explains what changes inside the audit, where deferred tax really comes from under UAE rules, what auditors ask for, and the issues that most often cause adjustments. If you first need to know whether corporate tax requires you to be audited at all, see our guide on who needs an audit report for corporate tax.
Two Tax Numbers Your Financial Statements Now Need
Current tax is the corporate tax payable for this year. It starts from your accounting profit, adjusted for items the Corporate Tax Law, Federal Decree-Law No. 47 of 2022, treats differently. The rate is 0% on taxable income up to AED 375,000 and 9% above it.
Deferred tax is tax that relates to this year’s figures but will be paid or saved in a later year. It arises when the accounting value of an asset or liability differs from its value for tax purposes. It is accounted for under IAS 12 Income Taxes.
Some differences never reverse. A fine is never deductible, so it raises current tax but creates no deferred tax. Auditors call these permanent differences. Deferred tax only comes from differences that reverse in a later year.
A Simple Example
| Item | AED |
|---|---|
| Accounting profit before tax | 1,200,000 |
| Add: 50% of client entertainment (total 40,000), Article 32 | 20,000 |
| Add: government fines, Article 33 | 10,000 |
| Taxable income | 1,230,000 |
| Taxed at 0% (first 375,000) | 0 |
| Taxed at 9% (855,000) | 76,950 |
| Current tax payable | 76,950 |
Your auditor will check each adjustment line, not just the final figure. Both add-backs here are permanent differences, so neither creates deferred tax.
Expert note · Farahat Tax Team
The add-backs we see missed most are entertainment and fines booked inside general expenses. Give each its own ledger code at the start of the year. The tax computation then becomes a report, not a search through invoices.
How much tax accounting work you face also depends on your accounting standard: full IFRS, IFRS for SMEs or the cash basis, set by revenue under Ministerial Decision No. 114 of 2023. Small companies using the cash basis or claiming Small Business Relief usually have little or no deferred tax. Larger companies under full IFRS need a proper deferred tax schedule.
Where Deferred Tax Actually Comes From in the UAE
Many general guides list depreciation and employee provisions as the main sources of deferred tax. In the UAE, that is usually not the case, because tax generally follows your accounting. The real sources are elections, losses and a few specific rules.
| Item | UAE corporate tax treatment | Deferred tax? |
|---|---|---|
| Depreciation of fixed assets | Tax depreciation generally follows accounting depreciation, with two exceptions. Capitalised interest is treated as interest under the interest limitation rules (Ministerial Decision No. 126 of 2023). Depreciation on capitalised non-deductible costs, such as fines, is not deductible. | Usually none from depreciation itself |
| End-of-service benefits | Employee benefits are deductible on an accrual basis under IFRS. Contributions to a private pension fund are deductible only when paid, up to 15% of salary (Ministerial Decision No. 115 of 2023). | Usually none for statutory gratuity provisions |
| Bad debts | Bad debts may be deductible where they are properly written off in the accounts and meet the general deduction rules. A later recovery is taxable. General expected credit loss provisions should be reviewed separately. | Possible, if general provisions are added back |
| Assets under the transitional rules | Ministerial Decision No. 120 of 2023 lets taxpayers elect adjustments for immovable property, intangible assets and financial assets or liabilities held at historical cost, so gains built up before corporate tax are excluded on sale. | Yes, where an election was made |
| Investment property at fair value | Ministerial Decision No. 173 of 2025 allows an irrevocable election for a yearly deduction of the lower of 4% of original cost or the tax written-down value. It is only available with the realisation basis. The accounts show no matching expense. | Yes, usually a deferred tax liability |
| Unused tax losses | Can be carried forward and offset against up to 75% of taxable income in a later year, subject to ownership or same-business conditions (Articles 37 and 39). | Yes, but only if future taxable profit is probable |
| Disallowed net interest | Net interest above the higher of AED 12 million or 30% of adjusted EBITDA is disallowed this year but can be carried forward for up to 10 tax periods (Article 30). | Yes, if future capacity to deduct is probable |
| Unrealised gains and losses | Follow the accounting treatment unless the realisation basis was elected under Article 20(3) in the first tax period. Not electing in the first year is treated as a final choice to follow the accounts. | Yes, if the realisation basis was elected |
Example: Investment Property
A company holds a building at fair value, originally bought for AED 5,000,000. It has elected the realisation basis and the Ministerial Decision No. 173 of 2025 deduction. It can claim AED 200,000 a year (4% of cost), while its accounts show no depreciation. Each year the tax value falls below the accounting value by another AED 200,000. At 9%, that adds AED 18,000 a year to the deferred tax liability in the balance sheet. After five years, the liability is AED 90,000 from this election alone.
Expert note · Farahat Tax Team
Our view: model the 4% deduction before you elect. It requires the realisation basis, which changes how all your fair-valued assets are taxed, and both choices are irrevocable. A lower tax bill today can come with a deferred tax liability your lenders will read. Property owners can see how this fits into a wider real estate audit.
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Which Rate to Use for Deferred Tax
IAS 12 measures deferred tax at the rate expected to apply when the difference reverses. In the UAE, that is not always 9%.
| Your situation | Rate auditors expect |
|---|---|
| Taxable profit well above AED 375,000 | 9% |
| Taxable profit close to AED 375,000 | Average expected rate, because of the 0% band (IAS 12.49) |
| Qualifying Free Zone Person, qualifying income | 0% |
| Qualifying Free Zone Person, non-qualifying income | 9% |
| Tax period under Small Business Relief | No deferred tax asset on losses, because losses from relief periods cannot be carried forward (Ministerial Decision No. 73 of 2023) |
A quick test for the band: if you expect taxable profit of AED 500,000, the tax is AED 11,250. That is an average rate of 2.25%, not 9%. Using 9% here overstates deferred tax four times over.
Large Groups: Pillar Two Top-Up Tax
Multinational groups with consolidated revenue of EUR 750 million or more face the UAE Domestic Minimum Top-Up Tax for financial years starting on or after 1 January 2025. IAS 12 contains a mandatory exception: no deferred tax is recognised for Pillar Two top-up taxes. The notes must instead state that the exception was used and show the current tax expense related to top-up tax. Auditors of in-scope UAE entities will check both points. For scope and registration rules, see our guide to the UAE top-up tax under Pillar Two.
What Your Auditor Will Ask For
Have these ready before fieldwork starts:
- The corporate tax computation for the year, starting from accounting profit
- A line-by-line reconciliation from accounting profit to taxable income
- A deferred tax schedule showing the accounting value, tax value, difference and rate for each relevant item
- Records of any elections made: realisation basis, transitional adjustments, investment property depreciation, accounting basis
- Forecasts supporting any deferred tax asset on tax losses or carried-forward interest
- Transfer pricing support for related-party and connected-person transactions
- A reconciliation of revenue in the accounts to revenue in your VAT returns
- Last year’s corporate tax return and any FTA correspondence
Common Issues That Slow Audits or Lead to Adjustments
- Tax losses recognised without evidence. A deferred tax asset on losses needs realistic forecasts showing future taxable profit. Without them, the auditor will ask for it to be removed.
- The wrong rate. Applying 9% across the board when profits sit near the 0% band, or when income qualifies for the free zone 0% rate.
- Elections with no paper trail. If the company made a transitional, realisation basis or investment property election, the auditor needs to see when and how. Missing records create questions about the tax values used.
- Add-backs missed. Entertainment, fines and penalties, and donations to non-qualifying entities are often left in deductible expenses.
- Related-party charges without support. Management fees and intercompany balances need agreements and arm’s length support.
- Revenue that does not match VAT returns. Differences between the accounts and VAT filings must be explained before the auditor signs.
- The tax computation prepared too late. If the tax figure is calculated after the accounts are finalised, the audit has to be reopened.
Expert note · Farahat & Co. Audit Team
A deferred tax asset on losses is one of the tax items auditors review most closely. After two loss-making years, a budget alone is rarely enough evidence. Auditors usually look for support such as signed contracts, a new revenue stream, confirmed cost reductions, or other evidence that future taxable profit is probable.
Disclosures Your Notes Need
Under IAS 12, the notes to your financial statements should include:
- The main components of tax expense: current tax, deferred tax and prior-year adjustments
- A reconciliation between accounting profit multiplied by 9% and the actual tax expense, explaining non-deductible items, exempt income and the 0% band
- For each type of temporary difference, the deferred tax recognised and its movement in the year
- Deductible temporary differences and unused tax losses for which no deferred tax asset is recognised
- For in-scope groups, the Pillar Two exception and related current tax
Qualifying Free Zone Persons should also consider explaining how they met the conditions for the 0% rate. IFRS does not require this note, but it helps banks, free zone authorities and the FTA understand the tax figures.
Timing the Tax Work Inside the Audit
The corporate tax return is due within 9 months of year-end, and it relies on your final figures. The return deadlines and who must file audited statements are covered in our guide on audit reports for corporate tax. Inside the audit itself, the order matters more than the date.
Expert note · Farahat Audit Team
Prepare the tax computation alongside the draft accounts, not after them. If the tax figure is finalised late, the auditor may need to revisit tax expense, deferred tax balances and the related notes. This can extend the audit timeline significantly, especially where management needs to revise the accounts or provide additional support.
Once the audit is signed, the corporate tax return can be prepared using the final audited figures, with the tax computation and financial statement disclosures already reconciled.
When Tax Issues Change the Audit Opinion
- Unmodified opinion: current and deferred tax are correctly measured and the disclosures are complete.
- Qualified opinion: a material tax misstatement that is not pervasive, for example a deferred tax asset on losses with no supporting forecast that management refuses to remove.
- Adverse opinion: tax misstatements that are both material and pervasive, such as ignoring corporate tax entirely.
- Going concern: large unpaid tax, penalties or loss of QFZP status can raise doubt about whether the company can continue. The auditor must assess this.
For what each opinion looks like in the report itself, see our guide to audit report types.
Farahat & Co. has audited UAE mainland and free zone companies since 1985. If you want your statutory audit and corporate tax return planned together, talk to our audit team.
Sources: Federal Decree-Law No. 47 of 2022, Articles 20, 30, 32, 33, 37 and 39; Ministerial Decision No. 73 of 2023; Ministerial Decision No. 114 of 2023; Ministerial Decision No. 115 of 2023; Ministerial Decision No. 120 of 2023; Ministerial Decision No. 126 of 2023; Ministerial Decision No. 131 of 2026; Ministerial Decision No. 173 of 2025; FTA Corporate Tax Returns Guide; FTA Interest Deduction Limitation Rules Guide; IAS 12 Income Taxes.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
