For the purpose of corporate tax calculation in UAE, deductible expenditures are accounting business expenses incurred to generate taxable income. However, the timing of the deduction may vary depending on the type of expense and the accounting method used. Expenditure on capital assets is recognized through depreciation deductions over the economic life of the asset or benefit. Therefore, if an expenditure serves a dual purpose, such as being incurred for both personal and business reasons, the relevant portion of the expense must be apportioned, with only the portion incurred exclusively for the business being treated as deductible. Thus, it is advisable for taxable persons to seek the expert services of Tax Consultants in UAE to effectively determine deductible expenditures in compliance with the Corporate Tax Regulation.
Non-deductible Expenditure for Calculating Taxable Income Purposes
Certain expenses are non-deductible when calculating taxable income, as specified in Article 33 of the UAE Corporate Tax statute. These expenses include bribes, fines, and penalties. To add on, no deduction will be allowed for expenditures related to income exempt from corporate tax or losses that are unrelated to or not arising from a taxpayer's business. Additional restrictions will be applicable on the deduction of interest expenditure.
Whereas, the deductibility of interest expenditure is subject to limitations imposed by the Corporate Tax Law to discourage excessive debt financing and ensure that certain intra-group transactions involving debt financing are deductible only if a valid commercial reason exists for obtaining the loan.
Is Interest Expenditure Fully Deductible for Corporate Tax Purposes?
As per the general interest deduction limitation rule, businesses with net interest expenditure above a threshold determined by the corporate tax law can deduct up to 30% of their earnings before interest, tax, depreciation, and amortization (EBITDA), excluding any exempt income. Any excess interest expenditure can be carried forward and utilized within the subsequent ten tax periods.
Rule of General Interest Deduction Limitation
Businesses with net interest expenditure below the threshold are not subject to this limitation. However, banks, other financial institutions, insurance providers, and individuals are exempt from the general interest deduction limitation rule.
Rule of Specific Interest Deduction Limitation
The specific interest deduction limitation rule applies when a loan is obtained from a Related Party and is used to finance income exempt from corporate tax. In such cases, the interest on the Related Party loan will not be deductible unless the taxpayer can demonstrate that the main purpose of obtaining the loan and conducting the transaction is not solely for obtaining a corporate tax advantage.
Are Paid Dividends Deductible for Corporate Tax Purposes?
Dividends paid by UAE companies are not deductible for corporate tax purposes.
Are our Service Fees Paid to Federal and Local Governments Deductible for Corporate Tax Purposes?
Similarly, service fees paid to local and federal governments are deductible for corporate tax purposes if they are incurred wholly and exclusively in the ordinary course of business.
Will Vat Paid Be Deductible for Corporate Tax Purposes?
Regarding Value Added Tax (VAT) in UAE, only irrecoverable input VAT may be deducted for corporate tax purposes. Any VAT charged or incurred will not affect the taxable income’s calculation.
Consult Tax Consultants in UAE
To effectively determine deductible expenditure in compliance with the Corporate Tax Regulation in UAE, it is advisable for taxable persons to consult Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.
Read More: Corporate Tax for Foreign Companies in UAE