The UAE Corporate Tax Law allows certain deductions in the computation of Taxable Income and sets out circumstances in which certain deductions are not allowed under the law. Thus, every taxable person in the UAE is permitted to an extent, some deductions in the calculation of their taxable income and shall be taking a look at the various types of deductions allowed and those disallowed by the UAE Tax Law.
There are expenditure deductions allowed under the UAE Corporate Tax Law Computing Taxable Income. The Tax Law allows certain expenses to be deducted by the taxable person in the computation of the taxable income. The UAE Corporate Tax provides that the Taxable person is allowed to deduct in the relevant tax period expenditures incurred solely and exclusively for the taxable person's business that are not capital in nature. However, the taxable person, to calculate the taxable income for a tax period, is not allowed deductions in the following, and are called non-deductible expenditures
- Expenditures incurred which are not connected with the business of the taxable person.
- Expenses incurred in getting exempt income
- Losses that are not related or not from the business of the taxable person
- Such other expenditures as may be determined by the UAE Cabinet
Were the expenses incurred by the taxable person for more than one purpose, the UAE Corporate Tax Law allows deductions for the following;
- Any part or proportion of the expenditure which is identifiable to be exclusively incurred for the purpose of deriving taxable income
- An appropriate part of any unidentifiable proportion of expenditure incurred for the purpose of taxable income has been determined on reasonableness and fairness, having taken the relevant facts and circumstances of the taxable person's business into consideration.
The UAE Corporate Tax Law provides that interest is a deductible expenditure that is required to be deducted in the tax period it is incurred by the taxable person subject to the rule under the law known as General Interest Deduction Limitation Rule.
General Interest Deduction Limitation Rule under the UAE Corporate Tax Law
This rules states that the Net Interest Expenditure of a taxable person can be deducted up to 30% of the accounting earning of such taxable person before interest tax, depreciation, and amortization for the relevant year are deducted, excluding any exempt income. The Tax Law defines Net Interest Expenditure for a tax period as the “amount by which the Interest expenditure incurred during the Tax Period, including the amount of any Net Interest Expenditure, carried forward exceeds the taxable Interest income derived during that same tax period.". Under the Tax Law, the Net Interest of a taxable person for the relevant tax period must exceed an amount specified by the Minister for the General Interest Deduction Limitation Rule to apply.
The UAE Tax Law allows a taxable person to carry forward the disallowed amounts of Net Interest Expenditure exceeding the threshold of 30% to be deducted in the subsequent ten (10) tax periods subject to the General Interest Deduction Limitation Rule. However, the UAE Corporate Tax Law excludes all other interest expenditures not allowed under the tax law, from the calculation of Net Interest Expenditure. The General Interest Deduction Limitation Rule does not apply to the following taxable persons;
- Insurance businesses
- Natural persons carrying out businesses in the UAE
- Any other person to be determined by the Minister
Specific Interest Deduction Limitation Rule under the UAE Corporate Tax Law
Under the UAE Corporate Tax Law, a taxable person is not allowed a deduction for Interest expenditure incurred on a loan obtained from a Related Party regarding certain transactions. These transactions include but are not limited to a dividend or profit distribution, a change in the capital structure of the Taxable Person or their Related Party, a capital contribution, or shares acquisition of another juridical person that becomes a Related Party after the acquisition. However, if the taxable person can show that the main objective of obtaining the loan and carrying out these transactions is not to gain a tax advantage, the restriction in the deduction of Interest expenditure shall not apply.
The Tax law further provides that where the taxable person can show that the person who received the interest is a taxable person under a similar tax law of an applicable foreign jurisdiction at a rate that is not less than the UAE corporate tax rate, the transaction and any related financing would not be considered to have been carried out to obtain Corporate Tax advantage.
The Corporate Tax Law recognizes certain costs, such as the cost to promote and market the business or to entertain the business's known and potential customers, could be incurred as part of the business expenditures, and the law has allowed those types of expenses to be deducted subject to the General Rules for Deductible Expenditure under the Corporate Tax Law.
Following the General Rules for Deductible Expenditure, a Taxable Person under the UAE Corporate Tax Law is allowed to deduct 50% of any expenses incurred for entertainment, amusement, or recreation during a Tax Period. The Taxable person is allowed to deduct any expenses incurred to entertain the customers, shareholders, business partners, suppliers, etc. Under the Tax Law, expenses such as meals, accommodation, transportation, admission fees, etc, are considered entertainment expenditures which are allowed to be deducted as per the General Rules for Deductible Expenditure. The law, however, does not regard expenses incurred by a taxable person in the entertainment of its staff or employee as entertainment expenditures.
Non-deductible Expenditure under the UAE Corporate Tax Law
Non-deductible expenditures are certain types of expenses that are not allowed to be deducted for Corporate Tax purposes under the UAE Corporate Tax Law. Under the law, deductions do not apply to the following:
- Donations, grants, or gifts to any entity except a Qualifying Public Benefit Entity
- Bribes and other illegal payments
- Fines and penalties except for amounts awarded as compensation for damages or breach of contract
- Withdrawn amount from the business by a naturally taxable person or a partner in an unincorporated partnership
- Corporate Tax payable by a taxable person under the Tax Law
- Recoverable input VAT
- Payments for Corporate Tax or taxes on income imposed by authorities outside of the UAE and
- Such other expenses as may be determined by Cabinet