This chapter outlines the provisions for the deductibility of business expenses under the UAE Corporate Tax regime when calculating the taxable income of a taxable person. Taxable persons understand more about allowable expenditures, the limitations of expenses in certain categories, and the treatment of specific cost types, such as interest and entertainment. The taxable persons must meet the conditions and the rules are devised to ensure that deductions are permitted only for legitimate business purposes as well as prevent tax avoidance practices. The regulatory framework also outlines non-deductible expenses categories to maintain transparency and compliance with the tax legislation.
Article 28 – Deductible Expenditure
Expenses that are wholly and exclusively incurred for the business activity of the taxable person, and that are not capital in nature, are considered as allowable deductions in the relevant tax period under certain conditions.
The following categories of expenses are explicitly excluded from deduction:
- Non-business-related expenditure – Expenses that are not connected to the entity’s core business activities are not deductible.
- Expenditure related to exempt income – Any expense related to generating income which is exempt from corporate tax will not be allowed for deductions.
- Losses unrelated to the business – Losses that do not arise from business operations will not be deductible under UAE corporate tax.
- Other Cabinet-specified expenses – The Cabinet, based on the Minister’s recommendation, may identify additional categories of non-deductible expenses.
If expenditure is incurred for more than one purpose, a deduction will be allowed for:
- A part or proportion of the expense incurred directly and wholly related to generating taxable income.
- A part or proportion of the mixed-purpose expenses based on a fair and reasonable method, considering the facts and circumstances of the business operations
Article 29 – Interest Expenditure
Interest expenditure is also deductible under UAE corporate tax period in which it is incurred, irrespective of the general exclusion of expenses related to exempt income. For interest expenditure to be deductible under UAE corporate tax, the taxable persons must comply with the rules specified under Article 28, 30 and 31. This ensures interest expenditure is recognized appropriately under specific conditions to prevent excessive deductions.
Article 30 – General Interest Deduction Limitation Rule
This article introduces a cap on the deductibility of Net Interest Expenditure (NIE) to avoid excessive debt financing and base erosion.
The Net Interest Expenditure is the excess of total interest expenses over taxable interest income in a particular tax period, which also include carried forward amounts from previous tax periods.
- Interest Deduction Limit – Net Interest Expenditure (NIE) is deductible up to 30% of the taxable person’s accounting EBITDA (earnings before interest, tax, depreciation, and amortization), which does not include exempt income.
- If net interest expenditure is below a threshold set by the Minister, the cap does not apply.
- Carry-forward Provisions – The net interest expenditures that are not deductible under UAE corporate tax can be carried forward for up to ten tax periods, under the same conditions.
- Certain entities, such as banks, insurance providers, and qualifying natural persons, are exempt from the General Interest Deduction Limitation Rule.
- The Minister may devise special conditions for the related entities, i.e same tax group, that prepare consolidated financial statements under applicable accounting standards.
Article 31 – Specific Interest Deduction Limitation Rule
This article outlines rules for related-party financing arrangements that could be used to generate tax benefits without genuine economic purpose.
Interest on loans from related parties will not be deductible if the funds are utilized for:
- Distributing dividends or profits to a related party.
- A redemption, repurchase, reduction or return of share capital to a Related Party.
- Making a capital contribution to a related party.
- Acquisition of ownership in an entity that becomes a related party after the acquisition.
There are certain exceptions where the taxable person can prove the transaction was not primarily intended to obtain a tax benefit.
No corporate tax advantage will be considered to arise if the related party is taxed at a rate mentioned in the corporate tax law in a foreign jurisdiction.
Article 32 – Entertainment Expenditure
Entertainment-related expenditures are partially deductible which allows recognition of legitimate business-related hospitality costs while also preventing excessive claims.
The deduction of 50% of qualifying entertainment expenses is allowed, including those related to:
- Meals.
- Accommodation.
- Transportation.
- Admission fees.
- Use of facilities or equipment for entertainment purposes.
- Additional expense categories may be specified by the Minister.
This deduction for entertainment expenses is applicable when such expenses are incurred in hosting customers, suppliers, shareholders, or other business associates.
Article 33 – Non-Deductible Expenditure
Certain categories of expenses are totally prohibited from deduction under UAE corporate tax law, in order to ensure compliance and discourage illegal expenses or expenses that are not related to business.
The following are non-deductible expenses under the corporate tax law:
- Donations, grants, or gifts to entities that are not considered as Qualifying Public Benefit Entities.
- Fines and penalties, except where paid as compensation for damages or any breach of contract.
- Bribes or other unlawful payments.
- Dividends, profit distributions, or similar benefits paid to owners of the taxable entities.
- Withdrawals of amounts by a natural person who is also a taxable person or a partner in an unincorporated partnership.
- Corporate tax payable under this law.
- Recoverable input VAT under the UAE VAT legislation.
- Foreign income taxes paid outside the UAE.
- Any other expenses identified by the Cabinet upon the Minister’s recommendation.
The UAE’s corporate tax rules on deductions aim to make concessions and between permitting legitimate business expenses and preventing non-legitimate practices that cause tax base erosion. By clearly defining the allowable expenses, limitations, and prohibited expense categories for deductions, the law offers provisions to businesses with a transparent framework to calculate taxable income on a fair basis.
Entities operating in the UAE must ensure accurate record-keeping, apply valid apportioning methods for mixed-purpose costs, and adhere to all deduction rules to stay compliant with the tax regulations and utilize tax benefits.
Businesses in UAE need to review their expense policies, financial process, and accounting practices to ensure compliance with the corporate tax provisions and to optimize their tax position within the framework of the Federal Decree Law No. 47 of 2022.
