UAE Corporate Tax Deductible and Non-Deductible Expenses: A Practical Guide for Businesses

With the introduction of UAE Corporate Tax, businesses must now consider more than whether an expense has been recorded correctly in their financial statements. They must also determine whether that expense is deductible when calculating Taxable Income.

An expense recorded in the profit and loss account is not automatically deductible for Corporate Tax purposes. Certain expenses may be fully deductible, partially deductible or completely disallowed.

Incorrect treatment of expenses can result in an understated Corporate Tax liability, inaccurate Tax Returns, penalties and additional enquiries from the Federal Tax Authority.

This guide explains the general rules governing deductible and non-deductible business expenses under the UAE Corporate Tax regime.

How is Taxable Income calculated?

The starting point for calculating a business’s Taxable Income is generally its accounting net profit or loss before tax, as reported in its financial statements.

The business must then make the adjustments required under the UAE Corporate Tax Law. These may include:

1. Adding back non-deductible expenses.
2. Restricting partially deductible expenses.
3. Excluding qualifying Exempt Income.
4. Adjusting transactions involving Related Parties or Connected Persons.
5. Applying the relevant interest deduction limitations.
6. Considering available tax reliefs and carried-forward Tax Losses.

The fact that an expense is correctly recognised under the applicable accounting standards does not necessarily mean that the full amount can be deducted for Corporate Tax purposes.

What is the general rule for deducting business expenses?

An expense will generally be deductible where it is:

1. Incurred wholly and exclusively for the purposes of the business.
2. Connected with the generation of Taxable Income.
3. Not capital in nature, unless deducted through depreciation or amortisation in accordance with the applicable accounting treatment and Corporate Tax rules.
4. Supported by appropriate invoices, agreements, calculations and other records.
5. Not specifically restricted or disallowed under the Corporate Tax Law.

Where an expense has both a business and a personal or non-business purpose, only the identifiable business portion may be deductible.

Where expenditure relates to both Taxable Income and Exempt Income, the business must allocate the expense on a fair and reasonable basis. The portion relating to Exempt Income is not deductible.

Common business expenses that may be deductible

Subject to the nature of the business, appropriate documentation and the applicable Corporate Tax rules, the following expenses may generally qualify for deduction.

1. Employee salaries and benefits

Salaries, wages, allowances, bonuses, medical insurance and other employment-related costs may generally be deductible where they are incurred for genuine business purposes.

Businesses should maintain:

1. Employment contracts.
2. Payroll records.
3. Salary transfer evidence.
4. Bonus calculations.
5. Reimbursement policies.
6. Supporting receipts for employee expenses.

Additional attention is required where salaries, bonuses or other benefits are paid to owners, directors, shareholders or their family members. Payments to Connected Persons must reflect the Market Value of the services provided. An excessive salary or benefit that is not commercially supportable may be adjusted for Corporate Tax purposes.

2. Office rent and utilities

Office rent, electricity, internet, telephone and other premises-related expenses will generally be deductible where the premises are used for the business. Where premises are used partly for business and partly for personal purposes, the expense should be appropriately apportioned. Businesses should retain tenancy contracts, utility invoices and evidence of payment.

3. Professional and consultancy fees

Fees paid for accounting, audit, legal, tax, information technology, recruitment, marketing and business consultancy services may generally be deductible where the services relate to the business’s taxable activities.

The business should retain:

1. Signed engagement letters.
2. Supplier invoices.
3. Scope-of-work documents.
4. Relevant reports or deliverables.
5. Proof of payment.

Fees connected exclusively with Exempt Income may not be deductible.

4. Advertising and marketing expenses

Genuine advertising, digital marketing, website development, promotional campaigns and other customer-acquisition costs may generally be deductible where they are incurred for business purposes. Businesses should distinguish normal marketing expenditure from entertainment expenditure, because entertainment costs are subject to separate deductibility restrictions.

5. Business travel expenses

Air tickets, hotels, local transportation and other travel expenses may be deductible where the travel is undertaken for genuine business purposes. Businesses should maintain documentation demonstrating:

1. The identity of the employee or representative travelling.
2. The business reason for the trip.
3. The client, supplier, conference or office visited.
4. The travel dates and itinerary.
5. The underlying invoices and payment evidence.

Personal holidays or costs relating to accompanying family members would not ordinarily qualify as business deductions.

6. Repairs and maintenance

Normal repair and maintenance expenses incurred to keep business assets operational may generally be deductible. However, expenditure that creates a new asset, significantly improves an existing asset or provides a long-term benefit may be capital in nature. Capital expenditure is generally recognised through depreciation or amortisation rather than being claimed as an immediate expense.

For example, repairing an existing business vehicle may be treated differently from purchasing a new vehicle. The purchase creates a capital asset, while the related depreciation recognised over its useful economic life may be deductible, subject to the applicable rules.

7. Depreciation and amortisation

Depreciation of tangible assets and amortisation of intangible assets recognised in the financial statements may generally be considered when determining Taxable Income. Businesses should ensure that:

1. The underlying asset exists.
2. It is used for business purposes.
3. Its cost is appropriately supported.
4. Its useful life and accounting treatment are reasonable.
5. Personal-use elements are excluded.

8. Insurance expenses

Business-related insurance costs may generally be deductible. These may include:

1. Property insurance.
2. Professional indemnity insurance.
3. Employee medical insurance.
4. Motor insurance for business vehicles.
5. Public liability insurance.

Insurance relating to personal assets or the private interests of shareholders would not generally qualify.

Entertainment expenses: only 50% may be deductible

Business entertainment expenses are subject to a specific restriction. Only 50% of qualifying entertainment expenditure incurred for customers, shareholders, suppliers or other business partners is generally deductible for Corporate Tax purposes.

Entertainment expenditure may include:

1. Meals.
2. Accommodation.
3. Transportation.
4. Event admission charges.
5. Hospitality facilities.
6. Equipment used for entertainment.

For example, where a business incurs AED 20,000 on a client event that is wholly related to the business, only AED 10,000 would ordinarily be deductible. The remaining AED 10,000 would be added back when calculating Taxable Income.

Where part of the expense is personal, the personal portion must first be excluded. The 50% deduction would then apply only to the qualifying business-entertainment portion. The 50% restriction generally does not apply in the same way to genuine staff entertainment, such as an internal employee event, provided that the event is not private in nature or arranged primarily for shareholders and their family members.

Interest expenses

Interest and financing expenses may be deductible, but businesses must consider both the general and specific interest limitation rules. Where Net Interest Expenditure exceeds AED 12 million for a Tax Period, the deductible amount is generally restricted to the greater of:

1. 30% of the business’s adjusted earnings before interest, tax, depreciation and amortisation; or
2. AED 12 million.

Disallowed Net Interest Expenditure may generally be carried forward for up to ten subsequent Tax Periods, subject to the applicable conditions. Separate restrictions may apply where a loan is obtained from a Related Party and used for transactions such as:

1. Paying a dividend or profit distribution to a Related Party.
2. Repurchasing or reducing share capital.
3. Making a capital contribution to a Related Party.
4. Acquiring an ownership interest in a person that is or becomes a Related Party.

The deductibility of financing costs can be complex and should be considered separately for businesses with significant debt, intra-group financing or shareholder loans.

Expenses that are generally non-deductible

The following expenses are generally disallowed when calculating Taxable Income.

1. Personal and non-business expenses

Expenses that are not incurred for the business are not deductible. Examples may include:

1. Personal holidays.
2. Personal shopping.
3. Household expenses.
4. Private use of company assets.
5. Education costs for shareholders’ family members.
6. Personal vehicle expenses unrelated to the business.

Where an expense contains both business and personal elements, only the properly supported business portion may be considered.

2. Expenses relating to Exempt Income

Expenses incurred in generating Exempt Income are generally not deductible. Where a shared expense relates to both taxable and exempt activities, the expense must be apportioned on a fair and reasonable basis. The methodology should:

1. Reflect the underlying business activity.
2. Be consistently applied.
3. Be supported by records.
4. Be capable of being explained to the FTA.

Possible allocation methods may be based on revenue, employee time, transaction volumes, floor space or another commercially appropriate measure.

3. Fines and penalties

Government fines and penalties are generally non-deductible. Examples may include:

1. Tax penalties.
2. Traffic fines.
3. Regulatory penalties.
4. Municipality fines.
5. Penalties for violating applicable legislation.

However, compensation paid for damages or breach of contract is different from a government fine and may require separate consideration based on the facts and business purpose.

4. Bribes and illicit payments

Bribes and other illegal payments are not deductible under the UAE Corporate Tax regime.

5. Certain donations, grants and gifts

A donation, grant or gift made to an organization that is not a Qualifying Public Benefit Entity is generally non-deductible. Businesses making charitable contributions should verify the recipient’s official status and retain supporting documentation before claiming a Corporate Tax deduction.

6. Dividends and profit distributions

Dividends, profit distributions and similar payments made to business owners are distributions of profit rather than expenses incurred in earning income. They are therefore not deductible.

7. Corporate Tax expense

UAE Corporate Tax paid or payable by the business is not deductible when calculating Taxable Income. This prevents a business from reducing its taxable profits by the amount of Corporate Tax itself.

8. Recoverable input VAT

Input VAT that is recoverable under the UAE VAT legislation is not deductible as a business expense for Corporate Tax purposes. Where input VAT is irrecoverable and forms part of the cost of an expense or asset, the Corporate Tax treatment should be considered together with the accounting treatment and the nature of the underlying cost.

9. Foreign income taxes

Income tax imposed outside the UAE is generally not treated as a deductible business expense. However, a Foreign Tax Credit may be available, subject to the relevant conditions and limitations.

10. Owner withdrawals

Amounts withdrawn from the business by a taxable natural person or by a partner in an Unincorporated Partnership are not deductible business expenses.

Payments to Related Parties and Connected Persons

Transactions with Related Parties must be conducted in accordance with the arm’s-length principle. This means that the price and terms should be consistent with those that would have been agreed between independent parties in comparable circumstances.

Payments to Connected Persons, including owners, directors and certain related individuals, may only be deductible to the extent that:

1. The payment corresponds with the Market Value of the service or benefit provided.
2. The payment is incurred wholly and exclusively for the purposes of the business.
3. The business can demonstrate that genuine services were provided.

Businesses should maintain agreements, calculations, timesheets, benchmarking and other documentation supporting material payments to Related Parties and Connected Persons.

Practical example of a Corporate Tax expense adjustment

Assume a UAE company reports accounting profit before tax of AED 1,200,000. Its expenses include:

1. Client entertainment: AED 40,000.
2. Government penalties: AED 15,000.
3. Personal travel of a shareholder: AED 25,000.
4. Corporate Tax expense: AED 60,000.
5. Staff annual event: AED 20,000.

The potential Corporate Tax adjustments would be:

Subject to there being no other adjustments, the company’s adjusted Taxable Income would be: accounting profit before tax of AED 1,200,000, plus potential non-deductible expenses of AED 120,000, giving an adjusted Taxable Income of AED 1,320,000.

This example is simplified. The actual treatment will depend on the facts, documentation, accounting policies and applicable Corporate Tax provisions.

Corporate Tax expense checklist for UAE businesses

Before submitting the Corporate Tax Return, management should review whether:

1. All personal expenses have been removed or separately identified.
2. Client entertainment has been appropriately restricted.
3. Government fines and penalties have been added back.
4. Corporate Tax expense has been added back.
5. Recoverable input VAT has not been claimed as an expense.
6. Expenses relating to Exempt Income have been identified.
7. Related Party and Connected Person payments are commercially supportable.
8. Interest limitation rules have been considered.
9. Capital and revenue expenditure have been correctly classified.
10. Donations have been made to eligible organisations.
11. Foreign taxes have been treated correctly.
12. Appropriate invoices, contracts and payment evidence are available.
13. The expense review is reconciled to the financial statements and Tax Return.

Importance of maintaining supporting records

Businesses should maintain sufficient records to demonstrate how their Taxable Income was calculated and why each material deduction was claimed. Relevant records may include supplier invoices, bank statements, contracts and purchase orders, expense reimbursement forms, travel approvals, payroll records, fixed-asset registers, Related Party agreements, entertainment expense schedules, interest calculations, tax adjustment workings, and financial statements and general ledgers.

Corporate Tax records and supporting documents should generally be retained for at least seven years following the end of the relevant Tax Period. Additional retention considerations may arise in specific circumstances, including certain unresolved refund or tax-audit matters.

How GKA Chartered Accountants can assist

Correctly identifying deductible and non-deductible expenses is an important part of Corporate Tax compliance. GKA Chartered Accountants can assist businesses with:

1. Corporate Tax impact assessments.
2. Review of general ledgers and expense classifications.
3. Preparation of tax-adjustment schedules.
4. Related Party and Connected Person reviews.
5. Interest-deductibility assessments.
6. Corporate Tax Return preparation and filing.
7. Review of supporting documentation.
8. Corporate Tax health checks.
9. Assistance with FTA enquiries and clarifications.

A structured review before filing can help identify errors, improve the reliability of the Tax Return and reduce the risk of avoidable tax exposures.

Frequently asked questions

Disclaimer

This article provides general information only and does not constitute tax, accounting or legal advice. The treatment of an expense depends on the nature of the transaction, the business circumstances, the supporting documentation and the legislation applicable during the relevant Tax Period. Businesses should obtain professional advice based on their specific facts before preparing or filing a Corporate Tax Return.