What are deductible and non-deductible expenses for UAE Corporate Tax?
The UAE has introduced Corporate Tax and a looming question is what expenses can I deduct from my business?
All businesses have expenditures, like: software, salaries, travel, office rent, employee benefits etc. Other tax jurisdictions have a criteria on what expenses count as deductibles. The question is what about the UAE?
In the UAE, there are some expenses you can’t fully deduct. If an expense serves multiple purposes, a deduction can still be claimed for the part or proportion of the expense that’s clearly and exclusively related to earning taxable income.
Here are a few examples of partial-deductions and non-deductibles:
Depreciation and Amortisation:
As of the time of writing this blog the UAE CT law is silent on the tax treatment of depreciation and amortisation, but CT laws in other jurisdictions consider depreciation and amortisation as non-deductible expenses.
Interest Expenses:
In line with the UAE CT Law, businesses can deduct their net interest expense (NIE), which is essentially the difference between what they pay in interest and what they earn from interest, up to 30% of their earnings before subtracting interest, taxes, depreciation, and amortization (EBITDA).
However, there’s a condition: if the NIE for a specific tax period doesn’t exceed AED 12 million, this deduction rule doesn’t kick in. But if it surpasses this threshold, businesses have the option to deduct either the threshold amount or 30% of their EBITDA, whichever is higher.
If, after doing the calculation mentioned earlier, the EBITDA (earnings before subtracting interest, taxes, depreciation, and amortization) turns out to be negative, then the EBITDA amount used for figuring out the 30% limit will be zero.
Note: Interest limitation rules will not apply to banks, insurance businesses, and certain other regulated financial service entities.
No interest deduction will be allowed if the loan was obtained, directly or indirectly, from a related party for the following transaction with the related party:
- dividends / profit distribution
- redemption, repurchase, reduction, or return of share capital
- capital contribution, or
- acquisition of ownership interest in a legal entity, who is or becomes a related party following acquisition.
VAT:
Only irrecoverable input Value Added Tax may be deductible for Corporate Tax purposes. Otherwise, Value Added Tax charged and Value Added Tax incurred would not impact the calculation of Taxable Income.
Charitable Donations:
Donations to organizations that aren’t recognized as public benefit entities won’t be eligible for tax deductions in the UAE.
Entertainment Expenses:
Expenses linked to entertaining clients, shareholders, suppliers, and other business associates—covering meals, accommodation, transportation, admission fees, and other specified costs by a Cabinet decision—can be deducted by up to 50% of the total amount spent.
Other non-deductible Expenses:
Dividends / profit distribution and other expenses specified in Cabinet decision will not be considered as deductible for UAE CT purposes.
Note: if you have any questions after reading this, please reach out to us.