In the UAE, businesses can reduce their taxable income by deducting certain expenses. However, not all expenses qualify for deductions under the Corporate Tax Law. The rules are designed to ensure that deductions apply only to legitimate business expenses while preventing misuse. Here’s what you need to know:
1. General Deductibility Rules
To qualify as deductible, expenses must meet two key conditions:
- Wholly and exclusively for business purposes – The expense must directly support the taxable business activity.
- Non-capital in nature – Expenses related to daily operations are deductible, but capital expenses, such as purchasing long-term assets, are not.
Example: Paying office rent is deductible, but buying a new office building is not.
2. Wholly and Exclusively Incurred Expenditure
Expenses must be entirely for business purposes to be fully deductible. If they serve both business and personal purposes, only the business portion is deductible.
Example: If a vehicle is used 70% for business and 30% for personal use, only 70% of the cost is deductible.
3. Capital Expenditure
Capital expenses provide long-term benefits to the business and are not immediately deductible. Instead, businesses can deduct depreciation over time.
Example: Buying machinery is a capital expense, but depreciation of the machinery’s cost over its useful life is deductible.
4. Special Rules for Certain Expenses
a. Interest Expenditure
Interest on business loans is deductible, but there are limits:
- Up to AED 12 million of interest is fully deductible.
- For interest exceeding this threshold, deductions are limited to the greater of:
- 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization).
- AED 12 million.
Certain exclusions apply, such as loans for non-business purposes (e.g., dividends or share buybacks).
b. Entertainment Expenses
For costs incurred to entertain customers, suppliers, or shareholders, only 50% is deductible. This includes meals, accommodation, and event-related costs.
Exception: Entertainment for employees (e.g., staff parties) is fully deductible, provided it is not personal in nature.
5. Non-Deductible Expenses
Certain expenses are specifically disallowed for corporate tax purposes, including:
- Personal expenses not related to the business.
- Costs incurred to generate exempt income.
- Fines and penalties (except compensation for damages).
- Bribes.
- Dividends or profit distributions.
- Recoverable VAT.
- Excessive pension contributions (over 15% of an employee’s salary).
6. Special Provisions for Infrastructure Projects
Infrastructure projects (e.g., transport, utilities, or education) that meet specific conditions, such as benefiting the UAE public, are exempt from interest deduction limits. These projects must meet criteria like long-term asset use and exclusive operations within the UAE.
Source: Corporate Tax Guide | CTGGCT1
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