As most businesses in the UAE have now completed their first Corporate Tax return filing and are preparing for the second compliance cycle, attention should shift toward the next phase of the tax regime,Corporate Tax audits.

With the UAE Corporate Tax framework maturing, it is expected that the Federal Tax Authority (FTA) will increasingly conduct audits to verify compliance with the Corporate Tax Law. Businesses should therefore begin preparing well in advance to ensure that they can respond effectively to any audit inquiries.

Importantly, under the Executive Regulation, the FTA is generally required to provide at least 10 business days' notice before conducting a tax audit. Given this relatively short preparation window, businesses should proactively review their records and compliance processes rather than wait for an audit notification.

Understanding Corporate Tax Audits

A Corporate Tax audit is an examination conducted by the FTA to assess whether a taxable person has complied with the provisions of the UAE Corporate Tax Law. During an audit, the FTA may review financial records, tax returns, supporting documentation, and business transactions to evaluate the accuracy of the tax positions adopted.

The primary objectives of a Corporate Tax audit include:

• Verifying the accuracy of Corporate Tax returns.
• Confirming the correct calculation of taxable income.
• Assessing the validity of deductions, exemptions, and reliefs claimed.
• Reviewing transfer pricing compliance.
• Identifying potential underreporting of income or non-compliance with tax regulations.

Factors That May Increase the Likelihood of a Corporate Tax Audit

Although businesses may be selected for a Corporate Tax audit through various risk-based assessment processes, certain circumstances are more likely to attract the attention of the tax authorities and result in closer examination.

1. Significant Tax Losses and Loss Carry-Forwards
Businesses reporting recurring tax losses or claiming substantial tax loss carry-forwards may be subject to review to ensure that losses have been calculated, carried forward, and utilized in accordance with the provisions of the Corporate Tax Law.

2. Related Party and Connected Person Transactions
Transactions involving related parties or connected persons are often a key focus area for tax authorities. Businesses should ensure compliance with transfer pricing requirements, including the arm’s length principle, and maintain sufficient documentation to support the pricing and commercial rationale of such transactions. Failure to do so may increase the risk of scrutiny during an audit.

3. Unusual Changes in Financial Performance
Significant fluctuations in revenue, profitability, taxable income, or profit margins compared with prior periods or industry norms may prompt further inquiries from the tax authorities to understand the underlying reasons for such variations.

4. Claims for Exempt Income and Tax Reliefs
Businesses claiming substantial exemptions or reliefs—such as participation exemptions, foreign permanent establishment exemptions, or other exempt income provisions—may face additional review, given the potential impact of these claims on reducing the overall Corporate Tax liability.

5. Deductibility of Expenses
The deductibility of expenses remains a common audit focus area. Tax authorities may assess whether expenses have been incurred wholly and exclusively for business purposes and whether they comply with the deductibility restrictions and limitations prescribed under the Corporate Tax Law.

6. Inconsistencies Across Regulatory Filings
Discrepancies between Corporate Tax returns, VAT returns, audited financial statements, transfer pricing documentation, and other regulatory filings may raise concerns and trigger a more detailed examination of the business’s tax affairs.

7. Industry-Specific Risk Factors
Certain sectors may be identified by the Federal Tax Authority (FTA) as higher-risk industries due to the complexity of transactions, prevalence of related-party dealings, or historical compliance trends. Businesses operating in such sectors may therefore be more likely to be selected for audit.

Record-Keeping Requirements

Proper documentation is the foundation of Corporate Tax compliance and plays a critical role during an audit.

Article 56 requires taxable persons to maintain records and documentation supporting the information reported in their Corporate Tax returns for a minimum period of seven years.

These records may include:

• Financial statements.
• Bank statements.
• Loan and financing agreements.
• Sales and purchase invoices.
• Accounting ledgers and trial balances.
• Import and export documentation.
• Inventory records.
• Fixed asset registers.
• Contracts and agreements.
• Transfer pricing documentation.
• Business correspondence supporting tax positions adopted.

The regulations do not require records to be maintained in their original paper format. Electronic storage methods, including scanned copies, are generally acceptable provided the records remain complete, legible, and readily accessible upon request by the FTA.

Businesses must ensure that accounting records, commercial books, and supporting documentation are maintained in a manner that enables the FTA to conduct tax audits efficiently and verify compliance with tax obligations.

The UAE Corporate Tax Audit Process

How Businesses Can Prepare for a Corporate Tax Audit

1. Ensure Timely Compliance
Meeting all Corporate Tax compliance obligations within the prescribed deadlines should be a priority for every business. Timely submission of tax returns, registrations, disclosures, and payments demonstrates a strong compliance culture and may reduce the likelihood of attracting regulatory attention.

2. Maintain Comprehensive Documentation
Well-maintained and organized records are essential during an audit. Businesses should ensure that all financial, tax, and supporting documents are complete, accurate, and readily available to substantiate positions taken in their tax filings.

3. Perform Regular Tax Health Checks
Periodic internal reviews can help identify and address potential compliance gaps before they become audit issues. Businesses should pay particular attention to tax computations, exemption claims, deductions, and transfer pricing arrangements.

4. Ensure Consistency Across Regulatory Filings
Corporate Tax returns should be aligned with VAT returns, audited financial statements, transfer pricing disclosures, and other regulatory submissions. Any inconsistencies should be identified and resolved in advance to minimize audit risks.

5. Strengthen Transfer Pricing Compliance
Businesses engaged in related-party transactions should ensure that transfer pricing policies, benchmarking analyses, and supporting documentation adequately demonstrate compliance with the arm’s length principle and applicable transfer pricing regulations.

6. Implement a Robust Tax Governance Framework
Establishing clear tax governance policies and procedures helps demonstrate that tax risks are proactively managed. Clearly defined roles, responsibilities, and internal controls can enhance compliance and strengthen audit readiness.

7. Obtain Professional Tax Advice
Independent reviews and assessments conducted by qualified tax professionals can provide valuable insights into potential risk areas and help businesses address deficiencies before they are identified during a tax audit.

Final Thoughts

The UAE Corporate Tax regime is still relatively new, but audit activity is expected to increase significantly as the tax system matures. Businesses that invest in strong record-keeping practices, proactive compliance reviews, and effective tax governance will be better positioned to manage audits confidently.

Corporate Tax audits should not be viewed merely as compliance exercises. They also provide an opportunity for businesses to evaluate the effectiveness of their tax controls, strengthen governance processes, and enhance stakeholder confidence in their financial reporting and tax compliance frameworks.

One area that deserves particular attention is transfer pricing. Tax authorities globally are increasingly concerned that profits may be shifted through related-party arrangements. Consequently, businesses should regularly assess whether their group structures, intercompany transactions, and pricing policies are commercially justifiable and aligned with transfer pricing requirements.

Early preparation, a thorough understanding of FTA expectations, and regular review of tax positions will significantly reduce audit risks and help businesses navigate Corporate Tax audits successfully.