How to Handle a Corporate Tax Audit in the UAE

Are you needing help understanding how to handle a corporate tax audit in the UAE for your business? As the UAE continues to diversify its economy and adopt international best practices, a federal corporate tax regime has been introduced for businesses operating both on the mainland and, in certain circumstances, in free zones. The Federal Tax Authority (FTA), with powers granted under the Federal Tax Procedures Law, oversees audit and compliance matters. For many organisations—particularly small businesses, start-ups, and those new to corporate taxation—understanding how to handle a tax audit is paramount.

We discuss all you need to know about corporate tax audits in the UAE, including how they are triggered, what the FTA looks for, and how businesses can prepare effectively. We will also highlight how Virtuzone’s specialised tax and business expertise can help you stay compliant and minimise risk.

Background: UAE’s Emerging Corporate Tax Framework

The UAE’s new Federal Decree-Law No. 47 of 2022 (the Corporate Tax Law) became effective for financial years starting on or after 1 June 2023. This marks the first time that companies in the UAE face a federal corporate tax on their profits:

1. Standard Tax Rate: 9% on net profits above USD 102,000 (AED 375,000).
2. 0% Threshold: Profits up to USD 102,000 (AED 375,000) remain untaxed, offering relief to smaller businesses.
3. Qualifying Free Zone Persons: Certain free zone entities meeting specific criteria may enjoy a 0% rate on qualifying income.

The introduction of this tax regime was partly driven by the UAE’s desire to align with OECD and global tax standards, diversify government revenue, and maintain its status as a competitive global business hub. However, with the new tax framework in place, businesses of all shapes and sizes must recognise that tax audits are no longer a remote possibility. The Federal Tax Authority (FTA)—tasked with enforcing compliance—has the right to examine corporate returns, assess the accuracy of reported figures, and impose penalties for non-compliance.

What Triggers a Tax Audit in the UAE?

The FTA conducts audits for a variety of reasons, generally tied to ensuring compliance and discouraging tax evasion. A few common triggers include:

• Risk-Based Analysis: The FTA uses risk models and data analytics to compare industry norms against declared profits. A company reporting minimal or no profits over multiple years—particularly if it operates in a lucrative sector—may be flagged for closer scrutiny.
• Random Selection: Not all audits are triggered by suspicious patterns. Some businesses are selected randomly for the FTA to conduct spot checks and ensure overall system integrity. Even fully compliant companies might face an audit at some stage.
• Major Transactions or Corporate Restructures: Large-scale mergers, acquisitions, or reorganisations can prompt the FTA to verify transaction values and ensure correct tax treatment. Cross-border or related-party transactions are also prime areas for investigation.
• Previous Non-Compliance: A history of penalties, late filings, or inaccurate returns increases the likelihood of a follow-up audit. Businesses that have faced sanctions in the past are considered higher risk.
• Associated Audits: An audit of another taxpayer (a supplier, customer, or related entity) might reveal inconsistencies linked to your organisation’s records, prompting the FTA to extend the scope and audit you as well.

Regardless of the reason, receiving an FTA audit notice means your financial records, tax returns, and overall compliance procedures will be placed under the microscope. While this can feel daunting, understanding the process and planning ahead will reduce stress and help you navigate the audit efficiently.

Legal Framework and the FTA’s Powers

The FTA’s authority to conduct audits is drawn from the Federal Tax Procedures Law (Federal Law No. 7 of 2017, as amended) and relevant Cabinet Decisions. Key provisions include:

• Audit Authority: The FTA can audit any taxpayer to verify compliance with UAE tax laws (corporate tax, VAT, excise).
• Notice Requirements: The FTA will typically issue a notice at least 10 business days before an audit, though unannounced visits can occur if tax evasion is suspected.
• Access to Records: Auditors have the right to examine, copy, or seize records and assets related to the audit. Businesses must retain records for at least seven years, as stipulated by the Corporate Tax Law and procedure regulations.
• Penalties and Assessments: If irregularities are discovered—such as underpaid tax, unreported income, or improper deductions—the FTA can impose additional tax assessments and administrative penalties.

It is essential to note that while the FTA has robust enforcement powers, taxpayers hold certain rights—such as requesting a proper notice of audit, verifying an auditor’s credentials, and accessing copies of any seized documents. Understanding these rights is a critical part of managing the audit process.

Steps in the Corporate Tax Audit Process

Although details may vary from case to case, most UAE corporate tax audits follow a similar structure:

1. Audit Notice:
   You receive a formal letter stating that your business has been selected for an audit, specifying the tax type (e.g. corporate tax) and the period(s) under review. Typically, you’ll have at least 10 business days to prepare.
2. Documentation Request:
   The FTA provides a list of required documents. Commonly requested items include:
   • Financial statements and supporting ledgers
   • Corporate tax returns and accompanying schedules
   • Bank statements, invoices, and contracts
   • Payroll records and expenditure receipts
   • Proof of any claim for relief or deductions
3. Providing these documents in a timely and organised manner sets a positive tone for the audit.
4. Remote Analysis (Desk Review):
   FTA auditors examine the submitted data for inconsistencies or unusual fluctuations. This phase may generate follow-up queries, which you should address promptly and accurately.
5. On-Site Inspection (Field Audit):
   If needed, the FTA auditors visit your premises to review original documents, observe your accounting systems, or inspect physical stock. This part of the audit can vary in length from a single day to several weeks, depending on the complexity of your operations.
6. Findings and Closing Meeting:
   The FTA discusses any discrepancies, proposed adjustments, or penalty recommendations. You will have the opportunity to provide clarifications or additional evidence before final decisions are made.
7. Assessment Notice:
   If the FTA finds that additional tax is owed or that certain tax returns were inaccurate, it issues an assessment detailing any tax shortfall and associated penalties. This notice also triggers your right to appeal if you disagree.
8. Appeal (If Necessary):
   You can file a reconsideration request with the FTA, then escalate to the Tax Dispute Resolution Committee, and potentially to the UAE courts—subject to strict deadlines and payment requirements.

At every stage, transparent communication and thorough preparation help maintain a smoother process, reducing the risk of prolonged scrutiny or higher penalties.

Preparing for a Corporate Tax Audit

Audit readiness should be an ongoing goal rather than a last-minute scramble. Implementing these best practices can greatly improve your organisation’s ability to handle an audit:

• Maintain Clear, Organised Records:
  UAE businesses must keep financial documents and supporting evidence for a minimum of seven years. A centralised document management system—whether physical or digital—makes record retrieval much easier.
• Adopt Strong Accounting Software:
  A reliable accounting system that follows International Financial Reporting Standards (IFRS) helps you generate accurate reports quickly. Ensure it maintains a detailed audit trail of transactions, from invoice issuance to final ledger entries.
• Reconcile Regularly:
  Bank statements, sales records, and expense ledgers should be reconciled frequently. Any anomalies discovered should be investigated immediately. Regularly reconciling your accounting profit with the taxable income reported on your corporate tax return is particularly important.
• Conduct Internal or Mock Audits:
  Periodic reviews—carried out internally or through a professional service—help identify compliance gaps. Detecting and rectifying errors on your own often leads to reduced penalties compared to having the FTA uncover them.
• Train Your Finance Team:
  Staff members handling day-to-day transactions should understand corporate tax obligations. They should know which records to keep and how to report expenses and revenue accurately. Having at least one person (or an external tax advisor) well versed in corporate tax law is crucial.
• Document Your Tax Positions:
  If your organisation takes a specific position on a tax matter—such as qualifying for free zone 0% status or claiming an exemption—keep a paper trail of the reasoning, advice from consultants, or any clarifications from the FTA. This evidence can be invaluable if your approach is later questioned.
• Seek Professional Guidance:
  Companies without robust in-house tax expertise often find value in appointing a registered Tax Agent or consulting professional firms like Virtuzone. Our experts can assist in all aspects of corporate tax compliance, from return filing to preparing you for possible audits.

By building a culture of compliance, you not only reduce audit risks but also reap long-term benefits in financial transparency and credibility.

Best Practices During the Audit

Once an audit begins, following these principles can make the process more efficient and less stressful:

1. Stay Organised and Responsive:
   Maintain a clear log of documents requested and provided, and label all files systematically. Respond to auditor queries within the stipulated timelines. If more time is genuinely required, communicate this early rather than missing a deadline.
2. Accuracy and Honesty:
   Falsifying records or withholding information is a serious offence. Offer precise figures and correct any known discrepancies voluntarily. Should you discover an error in your previous submissions, it is generally better to disclose this openly rather than waiting for the auditors to find it.
3. Cooperate with the Audit Team:
   Grant access to requested files, allocate a space for auditors if they are working on-site, and make relevant staff available for clarifications. A spirit of cooperation may positively influence how auditors view your internal processes and reduce suspicion of hidden issues.
4. Clear Communication:
   Engage in prompt, polite, and factual communication. If an auditor’s question seems ambiguous, ask for clarification to ensure you understand what is being requested. Maintain records of all key communications—emails, meeting minutes, or phone call summaries.
5. Professional Courtesy:
   Hosting auditors in a clean, quiet workspace with necessary facilities (e.g., a printer, internet access, relevant staff on hand) creates a positive, collaborative atmosphere. Confrontational or defensive behaviour often complicates the audit and could lead to stricter scrutiny.
6. Request Explanations of Findings:
   If the FTA identifies a discrepancy or proposes an adjustment, ask for the specific legal or regulatory basis. Knowing their rationale helps you provide targeted evidence or clarifications to resolve the point.

Post-Audit Process: Assessments, Penalties, and Appeals

After fieldwork concludes, the FTA will issue an audit report or final assessment. Possible outcomes include:

• No Changes Required:
  If your records were in good order and no violations were found, the FTA may simply close the audit. This is the best-case scenario, reflecting solid compliance practices.
• Revised Assessment and Penalties:
  If under-declared profits, overclaimed deductions, or missed registrations are identified, you will receive a revised assessment specifying additional tax due. Administrative penalties—typically a combination of fixed fines and percentage-based amounts—may also apply. UAE law allows for penalising late disclosures, record-keeping failures, and deliberate evasion.
• Appeals Process:
  If you disagree with the FTA’s conclusions, you can file:
  1. A Request for Reconsideration with the FTA
  2. An Objection to the Tax Dispute Resolution Committee
  3. An appeal to the Federal Courts (for certain high-value disputes)
• Strict deadlines and procedural rules apply. In many instances, the disputed tax must be paid upfront before a case can be heard. Companies often seek legal and tax advisory support when pursuing higher-level appeals to ensure arguments are well structured.
• Corrective Action and Compliance Improvements:
  Even if penalties are imposed, view the audit findings as a learning opportunity. Strengthen record-keeping and revise any misunderstood tax positions. Communicating these changes to key stakeholders (from finance staff to business owners) helps prevent repeated mistakes in the future.

How Virtuzone Can Support Your Corporate Tax Compliance

Since 2009, Virtuzone has helped thousands of entrepreneurs and established businesses set up and thrive in the UAE market. As the country’s regulatory landscape evolves, our tax experts guide clients through compliance challenges, from registering for corporate tax to maintaining audit-proof record-keeping. Here’s what we bring to the table:

1. Specialised Tax Advisory:
   Our team stays on top of the latest laws, Cabinet Decisions, and FTA guidance, offering practical advice tailored to your business structure—whether you operate in mainland UAE or are registered in a free zone.
2. Audit Preparation and Support:
   We can conduct mock audits, review your documentation for gaps, and train your finance team on best practices. If an FTA audit notice arrives, our experts will help you compile records, respond to queries, and liaise with auditors.
3. FTA-Registered Tax Agents:
   We have qualified Tax Agents recognised by the FTA. They can represent you in dealings with the authority, easing the communication burden and ensuring accurate, thorough responses to the FTA’s questions.
4. Ongoing Compliance Maintenance:
   From filing your annual corporate tax return to ensuring consistent record-keeping, we can provide continuous support. This includes assistance with VAT and other regulatory obligations to reduce the risk of conflicting or incomplete filings.
5. Strategic Business Advice:
   Beyond tax matters, we deliver strategic insights on expanding within the UAE, optimising your corporate structure, and navigating free zone incentives. By integrating business and tax advice, you gain a holistic approach to regulatory compliance and growth.

For those looking to secure peace of mind and avoid costly oversights, collaborating with a knowledgeable partner like Virtuzone can significantly streamline your experience under the UAE’s new corporate tax regime.

Practical Tips To Maintain Compliance

• Stay Updated: The UAE’s corporate tax regulations are still evolving. Follow FTA announcements, read updated Cabinet Decisions, and consult new guides that clarify key issues such as transfer pricing, free zone income, and small business relief.
• Align VAT and Corporate Tax Figures: If you also file VAT returns, ensure consistency between reported VAT revenue and corporate tax revenue. Discrepancies might raise red flags during a corporate tax audit.
• Track All Deadlines: Timely filing of tax returns and paying any assessed tax is crucial to avoid penalties. Maintain a calendar of key compliance dates, including year-end financial closings and submission deadlines.
• Avoid Panic in an Audit: If you receive an audit notice, treat it as a standard business procedure rather than a catastrophe. Gather your documents calmly, seek expert advice if needed, and engage with the FTA auditors professionally.
• Invest in Good Systems and People: Hiring or training staff for robust accounting and investing in reliable bookkeeping and financial software can pay dividends—both in day-to-day operational clarity and in ensuring audit readiness.

Be Prepared and Stay Compliant

By understanding how audits are triggered, what the FTA expects, and the importance of reliable record-keeping, you can reduce risk and demonstrate your commitment to compliance. The UAE’s corporate tax framework is new, but it follows established international principles—businesses that adapt swiftly, implement best practices, and seek professional support where needed will find the process far more manageable.

If you’re seeking a trusted partner to guide you through tax registrations, compliance, or prepare for a potential audit, Virtuzone is here to help. We have in-depth knowledge of UAE laws and hands-on experience supporting businesses of all sizes in building a stable, compliant presence in the Emirates. Get in touch with our specialised consultants to fortify your operations and handle any future audits with confidence.

At Virtuzone, we believe that proactive compliance is the cornerstone of long-term success, ensuring that your business can flourish and remain focused on growth—rather than on undue regulatory hurdles. By following the steps outlined in this guide and engaging our experts, you will be well on your way to audit readiness and continued success in the UAE.