There are instances when a business or a taxable person commits mistakes that may result in a penalty. On the other hand, a taxable person may be unaware or simply forget to claim a tax relief that might have resulted in a lower tax liability. Both these cases are not in favor of the entity. Therefore, one should understand the general rules of taxation in the UAE to avoid: fines and the failure to claim incentives. In this blog, we discuss the common tax pitfalls in the UAE and how businesses can avoid them. Let’s first define a tax pitfall.
What is a Tax Pitfall?
An error, mostly a human error, during an overall taxation process, is a tax pitfall. It includes the missed opportunities to claim tax relief or deduction. Thus, it is a result of the following two occurrences:
- Error in any part of the tax-related matters, e.g., tax filing.
- Failure to claim an applicable tax relief or deduction.
The result of either of the two above is usually monetary. The first one; errors, may result in scrutiny, audit, penalty, or a loss of reputation. The second one; failure to claim deductions or reliefs, usually does nothing concerning any of the above; however, the taxable person will miss the opportunity to decrease their tax liability. Let’s discuss some common tax pitfalls in the UAE with some tips to avoid them.
Common Tax Pitfalls in the UAE and How to Avoid Them
Taxation involves many processes and systems, including but not limited to tax registration, tax preparation, tax filing, documentation, and so on. Errors or mistakes in any process can result in a monetary or reputational loss for a business. Let’s highlight some of the errors concerning UAE business.
1. Failing to Meet Corporate Tax Registration Deadlines
Many taxable persons in the UAE are unaware of the fact that there are deadlines to register for corporate tax. This is based on the month of their license issuance. For instance, a juridical person who is resident (incorporated, established, or otherwise recognized) after March 1, 2024, must apply to register for CT within the following timeframes:
| When a taxable person is incorporated or recognized in the state or free zone as per applicable legislation. | 3 months from the date of incorporation or establishment. |
| When a taxable person is incorporated or recognized in the foreign jurisdiction as per applicable legislation but effectively managed and controlled in the state. | 3 months from the end of the financial year of the person. |
Similarly, there are different rules for other types of juridical persons. Remember that failure to meet the stipulated deadlines will result in a penalty of AED 10,000 as per Cabinet Decision No. 10 of 2024. For detailed insights on the deadlines, see our blog on corporate tax registration deadlines.
2. Inaccurate or Late Filing of Tax Return
As per the UAE tax laws, businesses must file and pay their corporate tax liability within 9 months from the end of the relevant tax year. However, only timely submission does not serve the purpose; the tax return must be correct. This covers both perspectives: mathematically and rules & regulations. An accurate tax return will result in a correct tax liability. The process is online and uses the EmaraTax portal.
To fulfill the regulatory needs of tax filing and payment, experts recommend using the services of professionals, such as CZTA. This in turn will keep your business compliant and avoid penalties. Furthermore, you will focus on your core duty: your business.
3. Failing to Claim Tax Incentives and Tax Deductions
One of the common potential pitfalls is failing to claim tax incentives. These include tax reliefs, exemptions, credits, and so on. This in turn will result in paying more taxes than is obligatory. For instance, in the UAE, businesses can claim small business relief if they meet certain conditions. To claim maximum legal tax incentives, you should have updated knowledge about the relevant laws and regulations. However, doors to consulting an expert are always open.
On the other hand, sometimes expenses in the accounting system are allowable, such as under IFRS, but not allowable under the relevant tax laws. Therefore, a business can only claim expenses or deductions allowed under the UAE corporate tax law. Tax deductions reduce the taxable income and thus reduce the tax liability. Hence, failing to claim the tax deductions will increase the tax liability. The goal of a business is to claim expenses that are according to the law, with no tax evasion.
4. Improper Record Keeping
A taxable person must keep all the records that enable the tax authority to calculate the tax liability correctly. But for how long? Well, most businesses should maintain records for at least 7 years from the end of the relevant tax year. However, laws are constantly updated, so keep an eye on them. There are now three perspectives on record-keeping:
- The amount of time for which a taxable person has to keep/store the records.
- Keeping complete records.
- Make arrangements to protect the records so that they are available upon scrutiny.
This shows that entities now need to invest in the maintenance of records too. With the rise in digital records, firms should take measures for cyber-security to avoid loss or theft.
5. Other Compliance Matters
There are various other matters where there is a need to deal with tax matters diligently. For instance, in the UAE, there are tax residency rules. These rules impact the way entities deal with their tax matters. For instance, you need to carefully assess the residency status, such as resident and non-resident. Furthermore, free zone entities and firms operating on the mainland have varying sets of rules. Free zone entities may qualify for a 0% corporate tax rate if they satisfy certain conditions. Similarly, businesses must learn the difference between corporate tax and value-added tax (VAT). They need to file their VAT returns too as per the relevant laws and regulations. Taxable persons submitting VAT returns must carefully check VAT calculations compliant with rules such as exempt or zero-rated supplies.
Final Thoughts
In the UAE, a business or a taxable person must be aware of the common tax pitfalls. The main reason is to avoid any monetary losses and compliance issues. However, the corporate tax landscape is currently in the evolving stage; therefore, the need to continuously learn and adapt is necessary. Most importantly, firms should be aware of the tax incentives available to their business and the relevant conditions. Furthermore, they should take maximum benefits from the tax deductions available. However, they should keep in mind that it should not be tax evasion or tax abuse.
Creative Zone Tax & Accounting (CZTA)
Do you want to take maximum tax incentives and be compliant with UAE laws, and thus avoid penalties? You are at the right place. We have years of experience in the field of taxation, with a team of qualified tax accountants. Contact us today for a tailor-made solution to your problems.
