First-year tax filing mistakes will draw regulatory scrutiny and penalties, says KISA's Nikos Kastellanis

With no previous tax data to reference, the Federal Tax Authority is expected to take a hard look at first-year submissions, especially in areas like expense classification, transfer pricing, and free zone claims

As UAE businesses prepare their financial statements for corporate tax filings, KISA Chartered Accountants (KISA) Managing Partner warns that when the dust settles after the September 30 deadline, common errors and omissions could trigger reviews and penalties from the Federal Tax Authority.

The clock is ticking for UAE businesses facing their first-ever corporate tax deadline. While many companies have registered and are working to prepare their filings, there’s a dangerous misconception in the market: that submitting the return is the end of the journey. In reality,  it’s just the beginning.

That’s the message from Nikos Kastellanis, managing partner of KISA, one of the UAE’s elite DFSA-Registered Auditors. KISA provides audit, tax, and advisory services to regulated and non-regulated entities across the UAE.

“Filing is not the finish line - it’s the starting whistle for a new phase of regulatory scrutiny,” Kastellanis says. The real risks lie beneath the surface - inside the filings - where hidden errors and inconsistencies could expose businesses to audits, penalties, and reputational damage.

Why first-year errors are especially risky

The UAE is navigating uncharted waters with its new corporate tax regime. Unlike mature markets, where historical filings provide a baseline, the Federal Tax Authority (FTA) will review returns this year without any prior-year benchmarks. Every tax position is being scrutinised for the first time - and that scrutiny will be sharp.

Globally, first-year tax mistakes are remarkably consistent. Businesses misclassify expenses, inflate deductions, or overlook Permanent Establishment obligations. Related-party transactions - common in multinational operations are frequently under-documented or priced in ways that don't meet the arm’s length standard. Many firms overstate losses without sufficient proof.

The OECD’s Tax Administration 2022 report shows that in jurisdictions introducing corporate tax for the first time, audit rates spike within two years, as tax authorities establish credibility early.

The FTA has published detailed guides, FAQs, and clarifications signaling a proactive stance on enforcement. Kastellanis notes, “The Federal Tax Authority doesn’t need to say much more - they’ve already made their expectations clear. The next step is enforcement.”

With the September 30 deadline looming, the time to correct errors during financial statement preparation is closing fast.

What triggers an audit?

Certain mistakes are already emerging as clear audit triggers.

A major pitfall is misuse of free zone tax claims. Many firms assume they automatically qualify for the 0% rate. But to benefit as a Qualifying Free Zone Person (QFZP), businesses must meet strict tests for both qualifying income and economic substance. A typical risk? A free zone company books revenue from UAE mainland clients but claims full exemption without segmenting and disclosing that income.

Other red flags include failure to register or late registration. Entities missing the deadline face fines and extra scrutiny. Startups and smaller firms are particularly at risk.

Another common issue is inconsistency between VAT and corporate tax positions. The FTA expects alignment across regimes. For example, a company reporting Dh20 million in VAT turnover but only Dh14 million in its tax filing will likely trigger an automated review.

Transfer pricing and related-party transactions are also under the microscope. UAE law requires disclosure forms and arm’s length documentation aligned with OECD standards. Failing to justify intra-group charges like excessive royalties raises compliance red flags.

Beyond technicalities, the FTA relies on human intelligence. The UAE’s Tax Evasion Reporting Facility allows anonymous whistleblowers to report suspected evasion, meaning disgruntled employees or competitors can also prompt investigations.

“What used to be an internal auditing decision can now be an audit trigger if not properly disclosed or documented,” Kastellanis warns.

Practical steps to stay ahead

What can businesses do? Kastellanis urges proactive review - even after filing.

“Companies should conduct an internal tax health check to identify weak points before the FTA does,” he advises. This includes ensuring VAT and tax filings are reconciled and consistent, especially when different teams handle each function.

For Free Zone entities, robust documentation is essential. Companies must prove both economic substance and proper classification of qualifying versus non-qualifying income.

Businesses with related-party transactions must prepare full transfer pricing files even for minor transactions because disclosure is mandatory from day one.

Finally, Kastellanis emphasises partnering with experienced auditors who understand both compliance and risk. “We’re not just auditors, we’re early warning systems. That’s the value of insight-driven advice,” he says.

What happens next?

As the first corporate tax filings are completed, follow-up from the FTA is inevitable. Kastellanis expects soft review notices and document requests to begin in Q4 2025, focusing on free zone claims, loss-making entities, and filings that don’t match VAT data.

And while penalties matter, Kastellanis stresses that reputational risk is just as serious. Being flagged can affect a company’s standing with banks, investors, and partners. In today’s compliance environment, a tax inquiry can quickly snowball into anti-money laundering, Know Your Customer (KYC), and Know Your Business (KYB) reviews.

“Smart businesses don’t wait to be audited - they act as if they already are,” Kastellanis concludes.