With the introduction of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the UAE Corporate Tax Law), the UAE’s new Corporate Tax (CT) regime is now in effect. Many businesses will be filing their first CT returns for the financial year 2024. Corporate tax is levied at 0% on the first AED 375,000 of taxable profits and 9% on profits above that threshold. Tax returns are due within 9 months after the year-end (for example, by 30 September 2025 for a calendar-year 2024 taxpayer). As the first filing deadlines approach, businesses should pay special attention to several critical tax issues, some of which are discussed below.
Unrealised Gains and Losses: The Realisation Basis Election
A critical one-time choice in the first CT return is whether to elect the “realisation basis” for unrealised gains and losses. Under normal accrual accounting, certain assets or liabilities can have unrealised gains or losses (for example, a rise in value of an investment property or securities portfolio) that are recorded in profit before any actual sale or settlement. By default, such unrealised gains would be included in accounting income and thus taxable. The realisation basis election allows a company to defer tax on unrealised gains and losses until they are actually realised.
This election is only available in the first tax period, and once made, it applies to all future periods unless exceptionally revoked with Federal Tax Authority (FTA) approval. The election can be applied in one of two ways: either to (a) all assets and liabilities that are measured at fair value through profit (or subject to impairment accounting), or (b) to all assets and liabilities held on capital account. For example, if an investment property’s fair value increased by AED 2 million during 2024, electing the realisation basis would mean this AED 2 million unrealised gain is not taxed in 2024 – instead, tax will only be due when the property is actually sold and that gain is realised.
Businesses with significant fair-value adjustments should strongly consider making this election in their first return, as it can defer the tax on such unrealised gains until a future sale, improving cash flow.
Transitional Provisions: Stepping Up Pre-CT Assets
The UAE CT Law also provides transitional rules to ensure that profits earned before corporate tax was introduced are not inadvertently taxed. If a business owns assets that were acquired before CT became effective (i.e. before the start of the first tax period) and those assets have gained value by the time CT begins, a one-time transitional election can be made to exclude the pre-CT portion of the gain (or loss) on those assets from taxable income. This prevents retroactive taxation of gains that accrued before the law was in force.
This transitional adjustment applies only to qualifying assets held on a historical cost basis. Qualifying assets include, for example, immovable property held before the first tax period, intangible assets existing before CT, and financial assets or liabilities from before CT – provided these were carried at cost and not at fair value in the opening balance sheet of the CT period. If the election is made, the company will need to report details for each such asset and its stepped-up value in a special schedule of the tax return. This election is only available in the first return and is irrevocable thereafter – it must be exercised in the first tax period or not at all, per Ministerial Decision No. 120 of 2023.
For instance, suppose a company bought land in 2018 for AED 10 million, and by 1 January 2024 (the start of its first CT period) that land’s market value had risen to AED 15 million. If the company sells the land in 2025 for AED 16 million, without the transitional relief the entire gain of AED 6 million (from AED 10m to AED 16m) would be subject to tax. With the transitional election, the asset’s tax basis is stepped up to AED 15 million (value at CT commencement), so only the AED 1 million post-CT gain is taxed, while the AED 5 million of pre-CT appreciation is exempt. Thus, the pre-2024 increase in value is not taxed. The Decision also prescribes an alternate time-apportionment method to reasonably allocate gains between pre-CT and post-CT periods.
Free Zone Companies: Maintaining Qualifying Free Zone Person (QFZP) Status
For companies operating in a UAE Free Zone, the corporate tax regime offers a potential 0% tax rate on qualifying income, provided the entity qualifies as a “Qualifying Free Zone Person” (QFZP) under the law. Article 18 of the CT Law sets out, and subsequent Cabinet and Ministerial decisions clarify, the conditions for QFZP status. This is a major benefit, but the onus is on companies to ensure they meet all the conditions to maintain the 0% rate.
The key conditions for QFZP status include: (1) maintaining adequate substance in the UAE (the free zone entity must have sufficient presence – offices, employees and expenditures – and conduct core income-generating activities in the Free Zone); (2) deriving only “qualifying income” as defined by Cabinet Decision; and (3) compliance with a de minimis limit on any non-qualifying income. In particular, any non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period. This small allowance is to enable incidental income – exceeding that threshold will disqualify the Free Zone entity from the 0% regime. Additionally, the company must not have elected to be taxed at the standard rate (since a Free Zone person can irrevocably opt out of the 0% regime), and it must comply with transfer pricing rules and maintain audited financial statements as required by the law and regulations.
If a Free Zone company fails any of the QFZP conditions at any time during a tax period, it is treated as non-qualifying from the start of that period – meaning its income for the entire year becomes fully taxable at 9%, and the company will be treated as a normal taxpayer for that year and for the subsequent four years. The 0% tax incentive comes with strict conditions, so proactive compliance is critical. The 0% tax benefit is valuable, but it can be forfeited without strict ongoing compliance.
Transfer Pricing Compliance and Related-Party Disclosures
The UAE’s corporate tax law introduces transfer pricing (TP) rules for the first time. Any transactions that a business has with its Related Parties must adhere to the arm’s length principle – i.e. they should be priced as if conducted between independent, unrelated parties. This means intra-group transactions – such as intercompany sales of goods, service fees, interest on loans, royalties for intellectual property, and even compensation or benefits provided to individual shareholders or directors (termed Connected Persons in the law) – all must be on arm’s length terms.
The CT return contains dedicated schedules to report related-party transactions and Connected Person transactions. Businesses are required to fill out the detailed Related Party Transactions disclosure only if the total value of all related-party transactions for the period exceeds AED 40 million. If you cross that threshold, then for each Related Party you must disclose the aggregate amounts of transactions by category (e.g. sales, service fees, interest, etc.) but only if the amount for that category exceeds AED 4 million with that particular related party. Likewise, any benefits or payments to a Connected Person (such as salaries or perks to a shareholder or director) need to be disclosed in the Connected Persons schedule only if the total value exceeds AED 500,000 for that person.
Additionally, Article 55 of the law requires certain taxpayers to maintain formal transfer pricing documentation (Master File and Local File) in line with OECD standards. Specifically, businesses that are members of large multinational groups, or that exceed a revenue threshold of AED 200 million in a tax period must prepare these files.
However, regardless of size, every business must maintain proper documentation of its related-party transactions and be prepared to substantiate that the pricing is at arm’s length. The law explicitly requires that transactions with related parties follow arm’s length terms and allows the FTA to adjust taxable income if they do not – hence having supporting documents on file is essential.
Conclusion
The UAE’s corporate tax framework is often praised for its simplicity and its low headline rate. However, the CT Law is supplemented by numerous Cabinet and Ministerial Decisions and detailed FTA guidance, which add important technical rules that businesses must not overlook. In fact, the FTA has published comprehensive guides on various topics to assist taxpayers. For example, the Corporate Tax Returns Guide (CTGTXR1), issued in November 2024, and the Determination of Taxable Income Guide (CTGDTI1), issued in July 2024, address many practical scenarios and elections that can arise in filing the first return. It is advisable for businesses and their tax teams to review these official resources to fully understand their options and obligations.
Filing the first UAE corporate tax return is a milestone that warrants careful preparation. By addressing the critical aspects above, UAE business owners and finance teams can approach their first CT return with confidence. The key is to be proactive and thorough – make the available elections judiciously, comply with the new reporting and disclosure requirements, and ensure that tax positions align with the actual substance of the business transactions. The inaugural CT return is not just a formality; it sets the tone for tax compliance going forward. With adequate preparation and a solid understanding of the rules, businesses can avoid surprises and make the most of any reliefs and preferential regimes available under the new tax system.