How Should UAE Businesses Prepare Their Accounting and Bookkeeping for Corporate Tax?

Why Accounting Quality Determines Corporate Tax Compliance Quality

Under Federal Decree-Law No. 47 of 2022, UAE Corporate Tax is calculated from accounting net profit as reported in IFRS financial statements. The taxable income figure on a Corporate Tax return is not a separate calculation built from scratch. It starts with the accounting profit and is adjusted for specific items permitted or required under the Corporate Tax Law. This means the reliability of the Corporate Tax return is directly dependent on the reliability of the underlying accounting records and financial statements.

A business with incomplete bookkeeping, misclassified expenses, or unreconciled accounts cannot produce accurate IFRS financial statements, and therefore cannot produce an accurate Corporate Tax return. The errors do not stay in the accounts , they flow directly into the tax computation, potentially understating or overstating taxable income and creating either a tax shortfall or an unnecessarily high tax liability.

The Accounting Standard Required: IFRS

All UAE businesses subject to Corporate Tax must prepare their financial statements under International Financial Reporting Standards (IFRS). This applies to both mainland and free zone companies. IFRS for SMEs is available as an alternative for businesses with annual revenue below AED 50 million, provided the relevant licensing authority or free zone does not require full IFRS. Where a business has elected IFRS for SMEs, that standard applies consistently; it cannot selectively apply full IFRS standards for some items and IFRS for SMEs for others.

US GAAP and local generally accepted accounting principles are not accepted standards for UAE Corporate Tax purposes. A business that has historically prepared accounts under a non-IFRS framework must transition to IFRS before its Corporate Tax return can be filed correctly.

What Financial Statements Must Be Prepared

A complete set of IFRS financial statements for a UAE business comprises:

• Statement of financial position (balance sheet): assets, liabilities, and equity at the period end, reflecting the carrying value of all assets and the full extent of the business’s obligations including any lease liabilities under IFRS 16, deferred tax positions, and end-of-service gratuity accruals
• Statement of profit or loss and other comprehensive income (income statement): revenue, costs, and net profit or loss for the period , the figure from which taxable income is derived
• Statement of changes in equity: movements in share capital, retained earnings, and reserves during the period
• Statement of cash flows: operating, investing, and financing cash flows for the period
• Notes to the financial statements: accounting policies, significant judgments and estimates, and disclosures required by the applicable IFRS standards

The financial statements must be prepared in accordance with all applicable IFRS standards, including IFRS 15 for revenue recognition, IFRS 16 for lease accounting, and IAS 36 for impairment assessments where relevant. The notes must disclose the accounting policies applied and any material judgments or estimates that affect the reported figures.

From Accounting Profit to Taxable Income

The Corporate Tax return starts with the accounting net profit from the IFRS financial statements and applies adjustments required by the Corporate Tax Law to arrive at taxable income. Understanding which adjustments apply is part of what the bookkeeping records must support:

• Non-deductible expenditure: certain expenses that are recognised in the income statement are not deductible for Corporate Tax purposes. These include fines and penalties, expenses not incurred for the purpose of the business, and 50% of entertainment expenditure. The bookkeeping records must identify and separately track these items throughout the year so that the adjustment can be made accurately at year-end
• Exempt income: qualifying dividends received from UAE or foreign subsidiaries, and qualifying capital gains, may be exempt from Corporate Tax. These amounts must be identifiable in the accounts to be correctly excluded from taxable income
• Transfer pricing adjustments: where the taxable person has related-party transactions, those transactions must be priced at arm’s length. Any adjustment the FTA makes to non-arm’s length pricing increases taxable income above the accounting profit figure
• Small Business Relief: businesses with revenue below AED 3 million may elect Small Business Relief, which treats taxable income as nil for that period. The revenue figure used for this assessment comes from the IFRS financial statements

What Accounting Records Must Be Maintained for Corporate Tax

The Corporate Tax Law requires every taxable person to maintain all records and documents necessary to enable the FTA to verify the accuracy of the Corporate Tax return and the taxable income calculation. Specific record-keeping requirements include:

• Books of account: a complete, chronological record of all financial transactions, including sales ledgers, purchase ledgers, cash books, and bank records, maintained in a form that allows accurate financial statements to be prepared
• Supporting documentation: invoices, contracts, bank statements, receipts, and correspondence that substantiate the amounts recorded in the books of account
• Payroll records: salary schedules, WPS submission confirmations, end-of-service gratuity calculations, and employment contracts
• Fixed asset registers: records of all assets owned, their cost, depreciation, and carrying values at each period end
• Related-party transaction records: where the taxable person has transactions with related parties or connected persons, complete records of those transactions including the pricing basis and supporting benchmarking or documentation
• Transfer pricing documentation: Local File and Master File where the applicable thresholds are met (aggregate related-party transactions above AED 4 million for the Local File)

All accounting records and supporting documentation must be retained for a minimum of 7 years from the end of the relevant tax period under the Corporate Tax framework. This is the controlling retention period for Corporate Tax purposes and supersedes shorter retention periods that may apply under other laws.

When Audited Financial Statements Are Required

Not every UAE business is required to have its financial statements independently audited, but the mandatory audit requirement under Ministerial Decision No. 84 of 2025 applies to:

• All Qualifying Free Zone Persons, regardless of revenue level
• All taxable persons with annual revenue exceeding AED 50 million
• All Corporate Tax Groups

Where the audit requirement applies, the financial statements must be audited by a licensed auditor registered with the Ministry of Economy before the Corporate Tax return is filed. The audit provides independent verification that the financial statements present a true and fair view in accordance with IFRS, and the audited statements form the basis of the Corporate Tax return submission. A QFZP that does not produce audited financial statements cannot access the 0% Corporate Tax rate on qualifying income for that period.

Businesses below the mandatory audit threshold that choose to have their financial statements audited voluntarily benefit from the additional assurance this provides in the event of an FTA audit or query on the Corporate Tax return.

Common Accounting Errors That Create Corporate Tax Risk

The following bookkeeping and accounting failures most commonly create downstream Corporate Tax compliance problems for UAE businesses:

• Expenses not properly coded: entertainment expenditure mixed with general expenses, or personal expenditure of shareholders treated as business costs, results in incorrect non-deductible expense adjustments in the Corporate Tax return
• Revenue not recognised under IFRS 15: recognising revenue too early or too late distorts accounting profit and therefore taxable income in the wrong period
• Lease obligations not on the balance sheet: under IFRS 16, all leases (except short-term and low-value) must be recognised as right-of-use assets and lease liabilities. Omitting these understates liabilities and distorts both the balance sheet and the income statement
• Gratuity not accrued: end-of-service gratuity accrues from the first day of employment. A business that does not accrue gratuity monthly understates its liabilities and overstates profit, producing a higher taxable income than the correctly stated position would
• VAT return revenue not reconciling to financial statements: where the revenue reported in VAT returns does not match the revenue in the financial statements, the FTA’s data-matching process identifies the discrepancy as an audit flag for both VAT and Corporate Tax purposes

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co. provides accounting, bookkeeping, IFRS financial statement preparation, and Corporate Tax return filing services to businesses across the UAE. Our team manages the full compliance cycle from transaction recording through to Corporate Tax return submission, ensuring that the accounting records that underpin the return are complete, current, and IFRS-compliant throughout the year.

Contact Farahat & Co. today to discuss your accounting and Corporate Tax compliance requirements.