Deduction under Corporate Tax in UAE

An expense is deductible under corporate tax if it was incurred wholly and exclusively for business purposes, which means the full amount has been incurred solely for these purposes and should not be capital in nature. If the expenditure is incurred for non-business expenses, it shall be added back while calculating Taxable income. Specific guidance is provided for rules regarding the deductibility of entertainment and interest expenditure.

Example: If an individual operating through a sole establishment carries on a Business of retail sales and such individual pays for a heart surgery work for himself, then it is likely that such expenditure will not have been incurred for the Business. It was incurred for their private purposes and the expenses would not be deductible for Corporate Tax purposes.

If expenditure is incurred partly for Business purposes and partly for some other purposes, the amount must be apportioned so that only the part relating to the derivation of Taxable Income will be allowed as a deduction. This may be based on an identifiable part of such expenses incurred wholly and exclusively for business purposes or apportioned on a fair and reasonable basis. What is fair and reasonable will depend on the circumstances and facts of each case.

Example: Mr B is running a Bakery. He owns a delivery van which is primarily used for collecting supplies and making deliveries to customers. Mr B also uses the van for personal use, such as shopping and driving his children to school. Records revealed that journeys made for a business purpose accounted for 60% of the use of the van, while the remaining 40% of use related to Mr B’s personal use of the van. Mr B’s Accounting Income for the Tax Period is AED 4,500,000. Vehicle expenses were calculated to be AED 120,000.

The vehicle expenses were not incurred wholly and exclusively for Mr B’s Business and a deduction can, therefore, not be claimed on the vehicle expenses in full. However, as Mr B can identify the proportion that relates to Business use (60% of journeys), AED 72,000 (60% of AED 120,000) can be claimed as an expense deduction. The remaining 40% (AED 48,000) cannot be deducted as an expense for Corporate Tax purposes.

So, while computing his taxable income, Mr. B shall add back AED 48,000 to the profits to determine the correct taxable income.

Capital expenditure is that which creates benefits to a business for a long period and it is not deductible for Corporate Tax purposes. This contrasts with revenue expenditure which supports the day-to-day operations of the business. The question of whether expenditure is of a capital or revenue nature will depend on the particular facts and circumstances and will need to be determined on a circumstantial basis. While capital expenditure is not deductible, the depreciation of the costs of capital assets is a deductible expense for Corporate Tax purposes.

Depreciation is an accounting concept that allows for the cost of an asset to be spread over the life of the asset, even though there is no cash outlay to the business.

Example: A cake shop buys a computer for use by office staff, and this computer has an expected useful economic life of 5 years. The initial expenditure for acquiring this computer will likely be treated as capital expenditure and not be deductible for Corporate Tax purposes, as this expenditure brings an enduring benefit to the business. If the business recognizes a depreciation expense over the useful life of the asset, then this expenditure is deductible in the year the depreciation expense is recognized.

Refer to our Interest Deduction Blog here : General Interest Deduction

Costs incurred to entertain customers, shareholders suppliers, or other business partners are categorized under entertainment expenses in general. Entertainment expenses often contain a private element that would prevent the expenditure from being wholly and exclusively incurred for Business purposes.

As the private element can be difficult to estimate and apportion when looking at entertainment expenditure, a 50% deduction is allowed for Corporate Tax purposes in all cases of this type of expenditure. Entertainment expenditure includes expenditure in connection with meals, accommodation, transportation, and admission fees, as well as facilities and equipment used in connection with such entertainment. The deductibility limitation does not apply to expenditures incurred for staff entertainment.

Just like some deductions allowed, there are specific deductions that are disallowed under corporate tax such as:

• Expenditure not incurred for the Taxable Person’s Business

• Expenditure incurred in deriving Exempt Income

• Losses not connected with or arising out of the Taxable Person’s Business

• A donation, grant, or gift made to an organization that is not a Qualifying Public Benefit Entity

• Any fines and penalties, other than amounts awarded as compensation for damages or breach of contract

• Bribes

• Dividends, profit distributions, or benefits of a similar nature paid to an owner of the Taxable Person

• Amounts withdrawn from the Business by a natural person who is a Taxable Person or a partner in an Unincorporated Partnership

• Corporate Tax

• Recoverable input VAT

• Tax on income imposed outside the UAE (can claim tax relief concerning this)

• Contributions made by employers to a private pension fund in respect of its employees which are not paid in the Tax Period or are over 15% of the employee’s total remuneration in the relevant Tax Period

The key takeaways include the importance of expenses being wholly and exclusively for business purposes to qualify for a deduction. Therefore a clear understanding of deduction principles not only ensures compliance but becomes a strategic tool for optimizing financial outcomes.