What expenses are deductible under UAE corporate tax?

Accounting parameters will decide how to calculate taxable income as per corporate tax in UAE. However, there is a restriction on deductions regarding certain expenses. That’s why you should count on different capping ordinances and nondeductible expenditures before your next tax strategy. The whole purpose behind it is to avoid any possible illegal activity in business-related matters and inflated deductions. Firstly, you should know what a tax deduction is.

According to the UAE Corporate Tax law, it corresponds to a sum of expenses that may be deducted from a Taxable individual’s taxable Amount to determine the tax that an individual is obligated to pay. A taxable individual’s income is decreased via tax deductions, lowering their tax obligation. Tax deductions are legitimate benefits offered by the laws of corporate tax in UAE and are deducted by taxpayers.

What does article 28 of corporate tax law say about deductible expenses?

The listing of expenses that may be deducted by a Taxable Person under Article 28 of the UAE Corporation Tax Legislation (Federal Decree Law no. 47 of 2022) to lower their Tax Payable is extensive. Let’s examine the exclusions that are offered by Article 28:

  • Expenses made solely and completely for business purposes;

Deductions are allowed for expenses that the Taxable Person incurs “wholly and solely” for business reasons under Corporate Tax in UAE. As a result, any expenses that are reasonable and undertaken in the regular course of business to generate Taxable Income are deductible. In the taxable duration during which they are racked up, these expenses are eligible for deductions. However, there is an exception in the case when expenses are incurred in the process of doing business that is “capital nature.”

  • Spending that is done to serve two or more reasons, or multipurpose spending:

There may be instances where expenses are used for dual purposes or for more than one reason. An expense might be utilized for both professional and private reasons, for instance. A deduction is permitted for the following if the expense is incurred for more than one purpose:

  1. Any measurable fraction or component of the cost that is expended solely and completely to generate Taxable Gain
  2. A competent and fair calculation of any unspecified portion of the cost incurred to generate taxable earnings that take into consideration all the factors and conditions pertinent to the taxable person’s business.

Corporate Tax Deductions that are prohibited as per Article 28 

The following costs incurred by a taxpaying person during a taxable period cannot be deducted from their taxable income:

  • Any outlay that wasn’t made about the taxpayer’s business.
  • Any outlay made to generate exempted revenue.
  • Losses unrelated to or originating from the Taxable Person’s Organization.
  • Any further spending that could be mandated by a Ministerial decree after a Minister’s recommendation.

Spending on Interest – Article 29

BEPS (Base Erosion & Profit Shifting) are frequently utilized to offset interest costs, which results in tax evasion. By using excessive amounts of loan funding through intra-group or Relevant Group dealings, the businesses claim interest deductions, which lowers their tax liability and helps them evade paying taxes.

The cap on accrued interest deductions is meant to make certain that there isn’t excessive debt finance and that there are dealings of a legal commercial character. The UAE Administration has formulated provisions for restricting the deduction of interest expenses at 30% by OECD’s (Organization for Economic Cooperation & Development) BEPS Action Plan 4- Interest Capping Rules.

Corporate tax Deduction rules for interest expenditures

Interest expenses that qualify for a tax deduction must be paid during the tax period in which they were incurred.

But, the following restrictions apply to these deductions;

  • Deduction limitation statute as per for General Interest as per article 30. 
  • Deduction Limitation Rule for Specific Interest as per article 31.

What does the term “entertainment expense” entail and its deduction rules? 

The term “entertainment expenditure” refers to costs associated with hosting and entertaining customers, investors, vendors, and other corporate collaborators of the taxable person, including but not confined to costs associated with;

  • Food.
  • Lodging.
  • Transportation.
  • Entrance fees.
  • Gear and services for pleasure, fun, and enjoyment.
  • Any additional costs that the Minister may impose.

The maximum amount that can be deducted for entertainment expenses is:

A Taxpayer may claim a deduction of up to 50% for any expenses spent, as per Article 32 of the Corporate Income Tax UAE.

Choose Corporate Tax Advisory Services

The above information gives a general idea and facts about deductible income. For detailed analysis, you need to ask field experts who can give you comprehensive details about your concerns. You can hire professional corporate tax advisors. For the purpose of making business easy for you, experts are always available at hand. They can guide you through different taxation processes. Without any 

Richard Maxwell

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