Allowed Expenses Under UAE Corporate Tax

A Comprehensive Guide to Allowable Expenses under UAE Corporate Tax

According to the UAE corporate tax law, accounting parameters determine the calculation of the taxable tax.  The accounting process turns possible illegal activities into business-related matters and inflated deductions.  Tax deduction, also known as allowed expenses,  refers to the sum of expenses that can be deducted from the total taxable amount, and it determines that a taxable person must pay the amount.

The Corporate Tax deductible expenses in UAE are allowed, where expenditure is incurred over one purpose, for any identifiable proportion of the expenses incurred completely and exclusively for deriving taxable income.

In addition, an appropriate proportion of any unidentifiable part of the expenses incurred to derive taxable income that has been determined on a fair and reasonable basis can be claimed for deduction for UAE CT purposes.

If you want to have a clear understanding of deductible expenses in UAE Corporate Tax,  you should spend time with us. We will provide every crucial information about the allowed or deductible expenses in the UAE corporate tax. In addition, we will highlight the list of expenses that can be deducted from this tax.

Scope of deductible expenses within Article No. 28 of UAE Corporate Tax

The listing of expenses that a taxable person can deduct within the United Arab Emirates Corporate Tax Legislation (Federal Decree Law no. 47 of 2022) to lower their payable tax is extensive. Article 28 lists numerous Tax deductible items in UAE business expenses.  Let us take a look at the list of the deductible expenses under Article 28:

➥ Expenses made solely and completely for the corporation’s purposes

Deductions that happen for expenses that the taxable person incurs “completely and solely” for the businesses’s reasons under the UAE corporate tax. Afterward, any costs, which are undertaken and reasonable within the regular courses of the company to generate taxable income are UAE Corporate Tax allowable expenses.

In the taxable period during which they are racked up, these expenses qualify for the deduction. However, there is an exemption when expenses are incurred within the procedure of performing business that is “capital nature”.

➥ Expenditures incurred for more than one reason

There can be a case where expenditure is used for over one purpose, i.e. dual purposes. For instance, the expenses are used for personal and business purposes. As per the UAE corporate tax law, it provides that the deduction is allowed if the expenditure is incurred for over one reason for the following:

• An appropriate share of any expenditure incurred to earn Taxable Income that is unidentified will be calculated on a fair and reasonable basis, taking into account the relevant facts and circumstances about the Taxable Person’s Business.
• An identifiable part of the expenditure that is completely and exclusively incurred to make taxable income

Spending on Interest – Article 29 

The UAE CT Law mentions that the Net Interest Expense (NIE) of up to 30 per cent of tax-adjusted earnings before interest taxes Depreciation and amortization (EBITDA) will be deductible.  However,  you cannot apply this rule if the NIE of the relevant tax period does not cross the threshold of AED 12 million. If this limit is exceeded, the taxable income can be deducted from the higher threshold or 30 per cent of EBITDA.

The following factors can be considered as interest in the purpose of the general interest limitation rules:

• Foreign exchange gain
• Interest component on forward contracts, futures contracts, alternative, agreement of interest rate and foreign exchange swap, or any other financial derivative instruments
• companies incur amounts relating to raising finance, including guarantee fees, arrangement fees, commitment fees, and any other fees similar in nature
• Interest in Islamic Financial tools that are compliant with the Sharia principles or any equivalent tools or the mixture of both
• The finance component of finance and non-finance lease payments

EBITDA is primarily the taxable income adjusted for the following products:

• Depreciation and amortization expenditures are considered to determine the taxable income for the relevant tax period.
• Any interest income or expenditure connecting to historical financial assets or liabilities held before 9 December 2022.
• Net Interest Tax (NIE) for the relevant tax period, excluding any connection to qualifying infrastructure projects

Suppose the EBITDA entered after the above calculation is negative, the actual amount of the EBITDA to be found out to determine the 30 percent threshold will be AED 0.

Debt instruments with terms agreed before December 9, 2022, are exempt from the general interest limitation rule according to the NIE. Additionally, the general interest limitation rule does not apply to NIE incurred by a qualifying infrastructure project person.

Interest limitation rules will not apply to insurance companies, banks, and other financial services entities. In addition, the interest limitation rules will not apply to corporations conducted by natural persons, individuals, or any other person that may be determined by the cabinet.

No interest deduction will be allowed if the loan was obtained, directly or indirectly, from the related party for the following transactions with the related party:

• Profit distribution or dividends
• Acquisition of ownership interest in a legal entity, who is or turns a related party following acquisition.
• Capital contributions
• redemption, return of share capital, repurchase, or reduction,

Entertainment expenses – Article 32

The entertainment expenditures involve all the costs incurred when entertaining the taxable person’s suppliers, customers, and more. According to the minister, meals, transportation, tools, facilities, and more are included in the entertainment expenses.

During a tax period, a taxable person can claim Corporate Tax deductible expenses in UAE of up to 50 per cent for entertainment expenditures. The person can claim the deduction for entertainment, amusement, or recreation during the relevant tax period. This fact has been specified per Article No. 28 of the UAE corporate tax law, which delves into deductible expenditure expenses.

How can Flyingcolour Tax Consultant help you?

Finding out the Allowed Expenses under UAE Corporate Tax might be difficult for numerous taxable persons. Flyingcolour Tax Consultant can help you find out the exact tax deductible or allowed expenses in this country. In addition, we will help you to file and pay the corporate tax returns in this country.

To learn more about the Allowed Expenses under UAE Corporate Tax , book a free consultation with one of the Flyingcolour team advisors, simply call +971 50 5585305 or send WhatsApp messages to +971 4 4542366. you can also drop an email to info (at) flyingcolour (dot) com.

This article was published on 28-03-2024. The information provided in the article is based on the policies and rules applicable at the time of writing it. Talk to one of our consultants for any recent updates or changes