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Locked In or Free to Choose? Elections and Revocability in the Second UAE Corporate Tax Return

Most UAE businesses have now filed their first Corporate Tax Return and are turning to their second. This is the point at which elections made or missed in the first return begin to show their real consequences.

Some elections are annual choices. Others bind the taxpayer for years. Others can only be made in the first Tax Period and may no longer be available at all.

We look at three elections that deserve particular attention in the second filing season: the Qualifying Free Zone Person (“QFZP”) election, Small Business Relief (“SBR”), and the realisation basis election.

The QFZP election: a five-period commitment

A Free Zone Person may elect to be subject to the standard Corporate Tax regime instead of the 0% QFZP regime. The consequence of that election are significant: it takes effect from the beginning of the relevant Tax Period, and applies for that period and the following four Tax Periods.

Therefore, a taxpayer that elected out of the QFZP regime in its first Tax Period cannot simply resume QFZP treatment in its second return. It remains subject to the standard Corporate Tax regime for the balance of the five-period period.

However, interestingly, we notice that in Second Tax Return, it continues to be possible to change the QFZP election on the EMARATAX Portal, despite the Law stating it is not possible. But in the Third Tax Return (for those who filed Tax Returns for June to December FY2023), it is not possible to change the election. This is bound to cause confusion.

Small Business Relief: annual, but the window is closing

Where SBR is elected, there is no obligation to determine taxable income or pay Corporate Tax. The election is made separately for each Tax Period. A taxpayer that did not claim SBR in its first return may still claim it in its second return, provided it meets the conditions for that Tax Period. In that sense, SBR is flexible.

Certain important limitations which need to be paid attention to before the Second Returns are filed, and a decision regarding SBR election is taken:

  • SBR is available only for Tax Periods ending on or before 31 December 2026. For many taxpayers, the FY2025 or FY2026 return will therefore be the final opportunity to claim the relief.
  • Revenue, including Exempt Income, must not exceed AED 3 million in the relevant Tax Period or in any previous Tax Period. Once the threshold is exceeded, the taxpayer cannot access SBR in a later period.
  • The relief is unavailable to members of multinational enterprise groups and QFZP. However, a Free Zone Person that is not a QFZP may still be able to elect for SBR, provided the other conditions are met.
  • The Tax Loss and Net Interest Expenditure arising during the SBR election period cannot be carried forward.
  • Arm’s length principle will continue to be applicable, even though Transfer Pricing Documentation is not required

The realisation basis: chosen once, felt every year

The realisation basis election is the least flexible of the three. It allows a taxpayer that prepares financial statements on an accrual basis to disregard certain unrealised gains and losses for Corporate Tax purposes, recognising them only when the underlying asset or liability is realised.

The election may apply to either:

  • all assets and liabilities subject to fair value or impairment accounting; or
  • all assets and liabilities held on capital account at the end of the Tax Period.

The election would have been made in the first Tax Period, and is now applies to all subsequent Tax Periods and is irrevocable, except in exceptional circumstances and with the FTA’s approval.

By the second return, therefore, the question is no longer whether to elect. It is how to apply the election already made.

A taxpayer that elected the realisation basis must bring previously excluded unrealised movements into account in its second Tax Return where the relevant asset or liability is realised during that period. It must also exclude unrealised gains and losses arising in the second Tax Period, subject to recognition when a subsequent realisation event occurs.

Accordingly, the FY2025 Corporate Tax Return is not simply a repeat of the first filing exercise. It is the point at which businesses should ask:

  • What elections were made in the first return?
  • Are they annual, multi-year or irrevocable?
  • Have their consequences been reflected correctly in the FY2025 computation?
  • What election is to be made now and what will be their consequences?

We will discuss these issues in more detail in our upcoming webinar, “Second UAE Corporate Tax Return”, in addition to the other issues that make the second Corporate Tax Return different from the first.