How UAE companies can avoid overpaying corporate tax due to misreporting of overseas income.

Following the introduction of a 9% corporate tax in the UAE, many companies fell under its purview and began paying it. However, not all entrepreneurs are aware that, in practice, some of the taxes paid under this system may have been calculated incorrectly, meaning it's possible to review and reduce the amounts. In this article, the experts at Antwort Law, an international law firm headquartered in Dubai, will discuss the most common mistakes companies and their employees make when accounting for foreign-sourced income, which can lead to additional financial costs. We'll help ensure your business doesn't overpay a single dirham.

First, it's important to note that the UAE Federal Tax Authority (FTA) taxes only UAE-sourced income and non-qualifying activities. In other cases, the tax remains zero, but many businesses pay 9% simply because their accountant chose the wrong transaction classification method, thereby creating a 9% tax base where it should not have existed. For example:

• International transactions that are actually classified as foreign-sourced
• Services provided to non-residents but formalized through an incorrect contract
• Income that should be classified as qualifying free zone income but was not supported by the structure
• Transactions conducted through a UAE bank but not considered income "from the UAE"

Let's look at the most common mistakes:

Mistake #1: Contracts do not reflect reality

If the contract is written incorrectly, the tax is paid by mistake. For example, the contract specifies a UAE company as the contractor, but the actual provision of services occurs:

• outside the UAE
• by employees outside the UAE
• in favor of a non-resident, which automatically classifies the income as foreign-sourced.

Mistake #2. Income "from abroad" is treated as local

This can be considered a common misconception: "If the money arrived in a UAE account, it's income from the UAE." Income can be considered foreign-sourced even if it was received through a local bank. The source of income is determined by the location of the service, the client's location, and the nature of the activity, not by the location where the payment is received.

Mistake #3. A Free Zone company loses its "qualifying" status

The company thinks it pays 0%, but in fact loses the tax exemption and becomes subject to the 9% tax. This can occur due to:

• incorrect holding structure or subcontracting
• mixing qualifying and non-qualifying income
• lack of economic substance
• incorrect contracts with clients.

Mistake #4. Incorrect accounting of "pass-through payments"

Another dangerous error is that many transactions are reported as income, but in fact are:

• refund
• transit payments
• operational compensation

Error #5. No tax memorandum

There is no single, strict methodology in the country. The main thing is that the company provides documentary justification for its position. If the FTA requests clarification and the business cannot provide any, then additional charges are very likely.

To avoid overpayments to companies, especially in sectors that fall into the so-called "gray zone" (IT development for non-residents through a UAE company, agency services, marketing and consulting for foreign clients, trading with external suppliers, SaaS models), it is necessary to legally structure the company and establish contracts correctly.

In such cases, Antwort Law first conducts a comprehensive audit of the structure, which makes it crystal clear which income should be taxed and which should not, and verifies:

• the source of all types of income
• the compliance of the activity with the license
• documents between counterparties
• the company's substance
• the transaction chain.

We then analyze the company's financial ceilings and payment logistics to align the classification of income sources not by account, but by the essence of the transaction. After all, the true source of income is determined not by the account, but by the essence of the transaction.

Next, we prepare a tax memorandum, which, once submitted, the FTA can consider reducing the tax base. We then create a flow map and exclude from the tax base any items that are not included. Finally, we re-draft contracts appropriately, as most companies in free zones lose their tax-exempt status due to improper contracts, not due to actual activity.

Also remember, even if a company accidentally overpaid taxes, a refund is possible, but only with proper justification. If you want to pay exactly what the law requires—without penalties, additional charges, or unnecessary expenses—you need a professional legal and tax strategy. Contact us, and we'll develop a personalized solution for you.

Lidia Ivanova

International lawyer
Antwort Law