With the introduction of UAE Corporate Tax (CT), business owners and finance professionals need to carefully review how taxable income is calculated, what accounting standards are acceptable, and how transitional and related-party rules apply. The UAE Ministry of Finance has issued detailed guidelines to ensure consistency in tax reporting, and understanding these rules is critical for compliance.
In this article, we break down the most important aspects of the Corporate Tax Guide, from accounting methods to transitional adjustments, helping you prepare your business for a smooth tax journey.
Taxable income and accounting standards.
The starting point for any UAE tax calculation is the standalone financial statements of the taxable entity.
IFRS is mandatory – The International Financial Reporting Standards (IFRS) are the only accepted accounting framework for UAE Corporate Tax.
IFRS for SMEs – Small and medium enterprises with annual revenue not exceeding AED 50 million may adopt IFRS for SMEs. This option reduces reporting complexity while remaining compliant.
This means that businesses must ensure their accounting policies and reporting structures are aligned with IFRS standards before submitting their tax returns.
Cash basis accounting.
For very small businesses or in exceptional circumstances, the law allows for a simplified approach:
- Eligibility – Taxable persons with annual revenue below AED 3 million may elect to prepare their financial statements under the cash basis of accounting.
- Practical benefit – This can ease reporting requirements for startups and SMEs that primarily deal with cash transactions.
Election for realisation basis.
Businesses may elect to be taxed on a realisation basis when submitting their first corporate tax return.
This election becomes particularly important for assets subject to revaluation. For example, when depreciation adjustments arise because the net book value exceeds the original cost (due to upward revaluation), the guide clarifies how these adjustments should be calculated.
Related-party transactions and arm’s length adjustments.
One of the most significant areas under UAE tax law is related-party transactions.
- If a transaction is not conducted at arm’s length (i.e., not aligned with market value), tax adjustments are required by both parties involved.
- Examples include situations where a related party overpays or underpays compared to the market value of goods or services.
- Both the transferor and transferee must make the necessary adjustments to align with the arm’s length principle.
For finance teams, this means robust transfer pricing documentation and market benchmarking are crucial to avoid disputes with tax authorities.
Transactions within a qualifying group.
Article 26(1) of the CT Law provides for special rules on intra-group transfers:
- If a gain for the transferor is exempt under CT law, the transferee cannot subsequently claim depreciation on that same gain.
- The Corporate Tax Guide provides worked examples showing how such adjustments should be spread over multiple years.
This reinforces the need for careful planning of intragroup restructuring or asset transfers.
Equity vs. cost method for investments.
When accounting for investments in associates and joint ventures, the Guide makes an important clarification:
- The equity method should not be used for UAE tax purposes.
- Instead, the cost method applies, meaning only dividends and profit distributions are recognized for tax purposes.
This avoids mismatches in taxable income calculations across group entities.
Non-deductible expenses.
Not all business expenses are deductible for UAE tax. Articles 28 to 33 of the CT Law specify which expenses qualify.
- General business test – Expenses must be wholly and exclusively incurred for business purposes.
- Non-compliant expenses remain non-deductible, even if they are recorded in the financial statements.
This highlights the importance of reviewing expense policies to ensure only qualifying costs are claimed.
Transitional rules and historical costs.
When moving into the UAE tax regime, transitional rules limit taxable gains to those arising after the start of the first tax period.
- Tax-exempt gains apply to qualifying immovable property, financial assets, and financial liabilities.
- The market value of immovable property will be determined by government authorities or certified third parties.
This ensures businesses are not taxed retroactively on gains that occurred before the CT regime began.
Movements in opening balance sheet items.
The Corporate Tax Guide confirms that subsequent movements in assets or liabilities from the opening balance sheet will follow accounting treatment.
For instance, if a provision for inventory recorded before CT application is later reversed, that reversal will become taxable when credited in the accounts.
Arm’s length principle for opening balances.
All related party balances in the opening balance sheet must reflect arm’s length pricing.
- If an asset was acquired from a related party above market value, future deductions will be limited to the arm’s length price.
- This prevents companies from inflating costs for tax benefits.
Why professional guidance matters.
The UAE corporate tax framework is comprehensive, but its application often involves technical judgment and detailed documentation. Errors in interpretation can result in penalties, tax reassessments, or reputational risk.
This is where experienced consultants add value. A professional tax advisor can:
- Review your financial statements for UAE tax compliance
- Assist with transfer pricing policies and arm’s length documentation
- Support in preparing for transitional adjustments and opening balance sheet corrections
- Ensure your business maximizes available reliefs while remaining compliant
Final Thoughts
The UAE’s corporate tax regime is designed to be clear and internationally aligned, but its technical nature demands careful planning. By understanding the key provisions around taxable income, related-party adjustments, and transitional rules, businesses can avoid costly mistakes and position themselves for sustainable compliance.
If you want expert support in navigating these complex requirements, our consultancy team is here to help. We provide tailored UAE tax advisory services that simplify compliance while protecting your business from risk.
