UAE Corporate Tax: Accounting Adjustments & Tax Losses Under FTA Scrutiny
Created By :
Yeeshu Sehgal | UAE Tax Lead
As UAE Corporate Tax enters its enforcement phase in 2025-26, the Federal Tax Authority (FTA) is actively scaling its audit activity. The FTA’s 2024 Annual Report recorded 93,000 inspection visits a 135% increase year-on-year. Businesses should expect FTA audits to closely examine the reconciliation between accounting profit and taxable income, and the legitimacy of tax loss positions.
Background
Under Federal Decree-Law No. 17 of 2025 (effective 1 January 2026), the Tax Procedures Law has been substantially rewritten with expanded FTA powers and a digital monitoring system that automatically flags non-compliance. Cabinet Decision No. 129 of 2025 (effective 14 April 2026) restructured the entire penalty framework. The FTA’s risk-based audit selection focuses on discrepancies between CT returns and VAT filings, sharp profit swings without business justification, and consistent losses that outpace industry norms.
What triggers FTA attention, and how should businesses prepare?
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Key accounting adjustments – non-deductible expenses: Article 28 of the CT Law provides that expenses are deductible if incurred wholly and exclusively for business purposes. Article 32 specifically disallows entertainment expenses beyond 50%. Errors often arise when accountants assume tax deductibility mirrors accounting recognition. Businesses must maintain detailed schedules of entertainment expenditure with business purpose evidence, and documentation supporting each claimed deduction. Fines and penalties except amounts awarded as compensation for damages or breach of contract are also non-deductible expenditure under Article 33. Businesses must maintain detailed schedules separating fines/penalties from compensatory damages, with documentation proving the legal basis and business purpose for each deduction claimed.
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Interest deduction limitation rules: In May 2025, the FTA released a comprehensive guide on interest deduction limitation rules clarifying what constitutes “interest expenditure” for General Interest Deduction Limitation Rule (GIDLR) purposes and the order in which CT provisions apply. The GIDLR caps net interest expense at the higher of AED 12 million or 30% of EBITDA. Businesses with significant related-party financing must also satisfy the Specific Interest Deduction Limitation Rule (SIDLR) to ensure arm’s length pricing and commercial rationale. Businesses should:
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Calculate net interest expense correctly (interest income minus interest expense),
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Apply SIDLR first before GIDLR,
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Document the commercial reason for related-party loans,
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Retain documentation showing how the GIDLR cap was applied.
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Tax loss carry-forward rules (Article 37): Tax losses carry forward indefinitely under Article 37, but utilisation is capped at 75% of taxable income per tax period — meaning at least 25% of each profitable year remains taxable regardless of carried-forward losses. Losses cannot be used to offset income from exempt activities or assets. Losses incurred before the CT regime (pre-June 2023) or before a person becomes taxable are permanently excluded. Businesses should document each loss year and maintain records for at least seven years.
Common Risk Areas
Many corporate tax errors are not intentional. They arise where accounting treatment is assumed to equal tax treatment — which is not always the case under UAE CT Law. The following issues are fixable, but corrections work best when done proactively before filing:
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Entertainment expenses claimed at 100% instead of the statutory 50% deductible limit (Article 32),
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Interest expense exceeding the General Interest Deduction Limitation Rule (GIDLR) cap of 30% of EBITDA (Article 30),
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Penalties, fines and non-business personal expenses claimed as deductions (Article 33).
Certain Practical Examples
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A manufacturing company that books entertainment expenses under “business development” without splitting client vs. staff portions risks claiming 100% deductibility. Only 50% of client entertainment is deductible (Article 32). Internal staff meals are 100% deductible if properly classified. The FTA may disallow the excess and impose penalties.
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Another common example is a management services company that charges affiliates without written intercompany agreements or pricing support. In that case, the FTA may question whether the income is properly documented and whether the transfer pricing rules have been followed.
Planning Points
Ownership continuity rules (Article 39): When more than 50% of a company’s ownership changes, the carried-forward tax losses are permanently forfeited unless business continuity is maintained (same or similar activity). This prevents “loss trafficking” — acquiring companies for their tax losses. Businesses undergoing restructuring must track ownership changes carefully. Loss transfers between group companies under Article 38 require 75% common ownership and matching financial years.
Small Business Relief and loss forfeiture: Businesses electing Small Business Relief (revenue below AED 3 million) in a tax period permanently forfeit any losses from that period — they cannot be carried forward. This means the SBR election must be carefully compared against the value of preserving losses for future profitable years. Businesses should run the SBR comparison before filing each period.
Key Takeaways
The key message is simple: accounting profit is not taxable income. Every adjustment from accounting profit to taxable income must be documented and defensible. Tax losses are a carry-forward asset — with no expiry — but their utilisation has strict conditions. Businesses with weak reconciliation files, undocumented adjustments, or loss positions without supporting records are most likely to attract FTA scrutiny as enforcement matures in 2026.
Voluntary Disclosure remains available under the new penalty framework — errors corrected early attract significantly lower penalties than those uncovered during audit.
How can we help?
AKM Global can assist you with reviewing your accounting-to-taxable income reconciliation, assessing deductibility of expense categories, calculating GIDLR exposure, preparing and reviewing TP documentation, applying for downward TP adjustment approval, and structuring tax loss utilisation strategies. Our team helps businesses strengthen their compliance position ahead of FTA review.