For corporate tax purposes in UAE, businesses engaging in commercial activities may incur costs related to entertaining existing or potential customers, as well as promoting their products and services. Such expenditures are eligible for deduction for Corporate Tax purposes, following the conditions for deductible expenses. However, it should be noted that entertainment expenditure typically involves some level of personal consumption, necessitating the apportionment of expenses. The Corporate Tax Law allows for a partial deduction of certain entertainment expenditures incurred during a Tax Period without requiring the Taxable Person to allocate the expenditure between business and personal use. Therefore, it is imperative for Taxable Persons to seek the services of Tax Consultants in UAE to effectively determine Entertainment Expenditure in compliance with the corporate tax law.
Conditions to Determine Entertainment Expenditure
The Explanatory Guide for corporate tax purposes in UAE stipulates that 50% of any entertainment, amusement, or recreation expenses incurred by a taxpayer during a Tax Period can be deducted from the taxable income for that respective period. It is important to note that the deductible amount may further be reduced before applying the 50% deduction as per the Corporate Tax Law. However, the deductibility limitation outlined does not apply to expenses incurred for staff entertainment, and such expenditures remain fully deductible.
List of expenditure categories that cannot be fully deducted from the taxable income
Entertainment expenditure, as defined in the Explanatory Guide, encompasses various items, including but not limited to the following, when incurred for the purpose of hosting and entertaining a Taxable Person's customers, shareholders, suppliers, or other business partners:
- Accommodation, such as hotel stays or other temporary lodging
- Transportation, including taxi fares, flights, and other modes of travel
- Admission fees, such as the cost of tickets for concerts, sporting events, golf outings, and theaters
- Facilities and equipment utilized in connection with entertainment, amusement, or recreation activities
- Any other expenses specified by a Ministerial Decision
The Explanatory Guide specifies certain types of expenditures that are not eligible for deduction in Corporate Tax calculations. Similar restrictions are commonly implemented in other jurisdictions to provide clarity regarding non-deductible amounts. These measures prevent the reduction of profits through undesirable means or through artificially manipulated payments, aligning with public policy objectives.
Provisions to promote and regulate social and public welfare activities
To promote and regulate social and public welfare activities in the UAE, the following provisions are established:
In order to qualify for a deduction for Corporate Tax purposes, donations, grants, and gifts must be made to eligible Public Benefit Entities. Fines and penalties that are not compensation for breach of contract or legally awarded payments are not deductible. Similarly, deductions are not allowed for bribes or illicit payments. Expenditure resulting from illegal acts is generally not deductible to prevent Taxable Persons from benefiting from illegal activities and to maintain the deterrent effect of fines and penalties.
Dividends, profit distributions, and similar payments or benefits provided to the owner(s) of the Taxable Person are not deductible. Such payments are considered distributions of profits rather than business expenditures and are not eligible for Corporate Tax deductions. This includes non-cash entitlements like bonus shares and performance-based compensation. Therefore, to prevent the reduction of profits through personal withdrawals, the Explanatory Guide denies deductions for amounts withdrawn from the Business by natural persons engaging in Business or Business Activities. The same applies to amounts allocated or distributed to partners in Unincorporated Partnerships.
Recoverable input VAT and payments for Corporate Tax or income taxes imposed by foreign authorities are not deductible for Corporate Tax purposes. These taxes are not considered expenditures incurred to derive Taxable Income. Whereas, the Cabinet has the authority to specify additional categories of non-deductible expenditures. There is no minimum threshold for non-deductible expenditure, and any expenses falling within the specified categories will not be eligible for deductions.
Consult Tax Consultants in UAE
To effectively determine Entertainment Expenditure in compliance with the corporate tax law, it is imperative for Taxable Persons to consult Top Corporate Tax Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.