Allowable Deductions Under UAE Corporate Tax Law

The UAE Corporate Tax Law allows certain deductions in the computation of taxable income, while also setting out specific circumstances where deductions aren’t permitted. Every taxable person in the UAE is entitled to particular deductions when calculating taxable income, and understanding both what’s deductible and what isn’t is essential to an accurate Corporate Tax return.

This guide covers general deductible expenditure rules, the interest deduction limitation rules with worked examples, entertainment expenditure, and non-deductible expenditure.

Deductible Expenditure

The UAE Corporate Tax Law allows a taxable person to deduct, in the relevant tax period, expenditures incurred solely and exclusively for the taxable person’s business that aren’t capital in nature. However, the following are treated as non-deductible when calculating taxable income for a tax period:

• Expenditures not connected with the taxable person’s business
• Expenses incurred in generating exempt income
• Losses not related to or arising from the taxable person’s business
• Other expenditures as may be determined by the UAE Cabinet

Where expenses are incurred for more than one purpose, the law allows deductions for:

• Any part of the expenditure identifiable as exclusively incurred for the purpose of deriving taxable income
• An appropriate portion of any unidentifiable expenditure, determined on a reasonable and fair basis, taking into account the relevant facts and circumstances of the taxable person’s business

Also check: Corporate Tax Services in UAE

General Interest Deduction Limitation Rule

Under this rule, a taxable person’s Net Interest Expenditure can be deducted up to 30% of accounting earnings before interest, tax, depreciation, and amortization (EBITDA) for the relevant year, excluding any exempt income. Net Interest Expenditure is defined as the amount by which interest expenditure incurred during the tax period, including any Net Interest Expenditure carried forward, exceeds taxable interest income derived during that same period. The rule applies only where Net Interest Expenditure exceeds a threshold amount specified by the Minister.

Disallowed Net Interest Expenditure exceeding the 30% threshold can be carried forward and deducted in the subsequent 10 tax periods, subject to the same rule continuing to apply. This rule doesn’t apply to banks, insurance businesses, natural persons carrying out business in the UAE, or any other person the Minister determines.

Must check: Corporate Tax Consultancy

Worked Example: Applying the 30% Interest Limitation

A company reports EBITDA of AED 10,000,000 for the tax period, with total interest expenditure of AED 4,000,000 and taxable interest income of AED 500,000, giving Net Interest Expenditure of AED 3,500,000. The deductible cap is 30% of EBITDA: AED 10,000,000 x 30% = AED 3,000,000. Since the actual Net Interest Expenditure (AED 3,500,000) exceeds this cap, only AED 3,000,000 is deductible in the current period. The remaining AED 500,000 isn’t lost, it can be carried forward and deducted in any of the next 10 tax periods, subject to the same 30% limitation continuing to apply in those future periods as well.

Specific Interest Deduction Limitation Rule

A taxable person isn’t allowed a deduction for interest expenditure incurred on a loan from a Related Party in connection with certain transactions, including a dividend or profit distribution, a change in the capital structure of the taxable person or its Related Party, a capital contribution, or the acquisition of shares in a juridical person that becomes a Related Party after the acquisition. Where the taxable person can demonstrate the main objective of obtaining the loan and carrying out the transaction wasn’t to gain a tax advantage, this restriction doesn’t apply.

Entertainment Expenditure

The law recognizes that costs incurred to promote or market the business, or to entertain known and potential customers, can genuinely be part of ordinary business expenditure, and allows these to be deducted subject to the general deductible expenditure rules described above.

A taxable person can deduct 50% of expenses incurred for entertainment, amusement, or recreation during a tax period, including expenses to entertain customers, shareholders, business partners, and suppliers. Meals, accommodation, transportation, and admission fees connected to these activities are all considered entertainment expenditure eligible for this 50% deduction. Notably, the law doesn’t treat expenses incurred entertaining a taxable person’s own staff or employees as entertainment expenditure under this rule.

Worked Example: Calculating the Entertainment Expenditure Deduction

A company spends AED 200,000 during the tax period hosting client dinners, covering meals, transportation, and venue costs for existing and prospective customers. Under the entertainment expenditure rule, only 50% of this amount is deductible: AED 200,000 x 50% = AED 100,000. The remaining AED 100,000 isn’t deductible and adds back to taxable income. If AED 30,000 of that AED 200,000 had instead been spent on an internal staff appreciation event, that portion wouldn’t qualify as entertainment expenditure under this rule at all, and would need to be assessed separately under the general deductible expenditure rules rather than the 50% entertainment cap.

Non-Deductible Expenditure

Certain expenses are never deductible for Corporate Tax purposes under UAE law, regardless of the general rules above:

• Donations, grants, or gifts to any entity except a Qualifying Public Benefit Entity
• Bribes and other illegal payments
• Fines and penalties, except amounts awarded as compensation for damages or breach of contract
• Amounts withdrawn from the business by a natural person or a partner in an unincorporated partnership
• Corporate Tax payable by a taxable person under the law
• Recoverable input VAT
• Payments for Corporate Tax or income taxes imposed by authorities outside the UAE
• Other expenses as may be determined by Cabinet

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Tax Firm in UAE, helps businesses accurately apply Corporate Tax deduction rules, including interest limitation calculations and entertainment expenditure classification.

Contact Farahat & Co. today to discuss your Corporate Tax deduction requirements.