Some UAE companies strategically manage their Corporate Income Tax (CIT) by categorizing employee costs as bonuses or incentives. While these expenses might offer tax deductions, the situation can quickly escalate if these amounts remain unpaid.
CIT Risk: If bonuses remain unpaid for more than 12 months or are redirected to partners/shareholders instead of employees, the FTA could disallow the tax deduction, impacting your CIT standing directly.
Legal Risk: When bonuses are contractual or customary, employees can claim them within a year of being due. Failure to fulfill these payments could lead to breach of contract claims, MOHRE grievances, and harm to the company's reputation.
Profit Distribution Trap: Redirecting bonuses to owners rather than employees might be viewed as a disguised dividend, triggering further compliance challenges.
To safeguard tax deductibility and ensure compliance with labor laws, UAE companies must not only account for bonuses and incentives as expenses but also disburse them promptly. Delayed payments could raise concerns with tax authorities and regulators, inviting legal conflicts and financial repercussions.
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