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Ways to optimize corporate tax in the UAE in 2026

Ways to optimize corporate tax in the UAE in 2026 - Makebiz

After the introduction of corporate tax in the UAE in 2023, the business environment of the state has changed significantly. The tax base is now determined not by the company’s cash flows, but based on its accounting profit, calculated according to international financial reporting standards, taking into account adjustments provided for by local legislation. This approach opens up additional tools for legitimate tax optimization, which is particularly important for businesses in 2026.

Understanding Accounting Profits

One of the most common mistakes among business owners is a misunderstanding of how the tax base is calculated. Many of them believe that income tax is determined from the actual balance of funds in the bank account. However, this is not the case. The tax base is formed based on the boom. profit, which, in turn, is prepared in accordance with IFRS standards. This means that for a correct calculation, it is necessary to take into account not only cash flows, but also accounting records.

The IFRS 15 standard is of fundamental importance for the correct reflection of revenue. According to its requirements, income is recognized not at the time of receipt of funds, but when the company actually fulfills its obligations to the client.

Consequently, advances received before the provision of services or the delivery of goods do not always relate to the income of the current reporting period. Proper distribution of revenue between the reporting periods allows you to reliably present the financial situation of the company and at the same time optimize the tax burden within the framework of current legislation.

Application of the «Basis of Implementation» principle 

The use of the «realization» principle makes it possible not to include unrealized asset revaluation results in the tax base. This approach is especially important for holding structures, investment companies and organizations working with financial instruments, where the so-called «paper profit» can significantly artificially increase the amount of taxable profit.

Feature allows companies to manage their tax burden more flexibly, avoiding taxation based on unrealized income. This opens up new opportunities for legitimate corporate tax optimization, allowing businesses to focus on real financial results.

Ways to optimize the load

Corporate tax is applied to companies whose profits exceed the established threshold. However, the country’s tax legislation offers several legitimate ways to optimize taxation that will allow businesses to significantly reduce costs.

1. Dividends received from companies registered in the UAE are not subject to taxation. This means that they can reinvest their income without additional tax costs, contributing to business development.

2. While complying with the conditions of the participation exemption, firms may also exclude dividends received from foreign subsidiaries from the tax base, which creates additional opportunities for international expansion.

3. Companies can choose an exemption regime for income earned from foreign subsidiaries. This avoids double taxation and reduces overall tax costs.

4. There are many free economic zones in the UAE where companies can receive qualifying income (qualified income), which is also not subject to taxation. This makes the FEZ attractive for new investments and start-ups.

In addition, the Emirates provides regimes that allow for the application of a zero corporate tax rate:

  • Assistance to small businesses.Firms with low revenues can take advantage of the Small Business Relief regime, which allows them to completely avoid paying corporate tax. This creates favorable conditions for small and medium-sized enterprises, contributing to the development of entrepreneurship in the country.
  • Qualified Free Zone Person (QFZP). Companies registered in free economic zones and meeting certain criteria can obtain the status of a qualified resident of the free zone, meet certain criteria, which also exempts them from paying corporate tax. 
  • Exempt types of income (Exempt Income). Tax legislation also defines a number of types of income that are not subject to taxation. This may include dividends, rental income, and other types that can be used to optimize taxation.

Creating reserves 

Following the standards, companies can create reserves to account for expected credit losses, employee leave provisions, and severance payments. They allow you to more accurately reflect the financial condition of the company and, as a result, reduce taxable profits.

1. Expected credit losses. Companies should take into account the likelihood of non-repayment of debts and create appropriate reserves. This not only reduces the taxable profit, but also reflects the actual financial situation of the business.

2. Reserves for employee vacations. Employers are required to account for their employees’ vacation expenses. The creation of vacation reserves allows you to evenly distribute these expenses throughout the reporting period and avoid sharp fluctuations in financial results.

3. Post-employment benefits. In the Emirates, employees are entitled to severance payments at the end of their employment contract. Accordingly, it is also possible to create a reserve here.

Optimization strategy

The main steps to achieve this goal include:

— Correct recognition of income. It is important to follow the principles of IFRS in order to accurately reflect income in the financial statements.

— Regular creation and review of reserves.

— Application of exemptions. Companies should actively use all available tax benefits and exemptions.

— Preparation of documentation. Keeping careful records and documentation will help you avoid problems with tax authorities.

The legitimate optimization of corporate taxes in the UAE in 2026 requires careful approach and careful planning. The creation of reserves in accordance with IFRS, the correct recognition of income and the use of available tax exemptions are key aspects that will help companies reduce taxable profits and avoid overpayments. Understanding and applying these principles will ensure financial stability and successful business operations in a changing tax environment. Cooperation with qualified specialists in the field of accounting and tax legislation is a key decision that ensures the success of both large and small enterprises. Make an appointment for a consultation with a Makebiz accountant and learn more about the optimization methods that suit you.

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