When preparing a UAE Corporate Tax Return, a business normally starts with the accounting profit or loss shown in its financial statements. That figure is then adjusted in accordance with the UAE Corporate Tax Law to determine Taxable Income. One of the most important parts of this calculation is identifying which expenses are deductible, partly deductible or non-deductible.
An expense appearing in the accounts is not automatically deductible for Corporate Tax purposes. The treatment depends on why the cost was incurred, whether it relates to the business, the supporting records available and any specific restriction under the Corporate Tax rules.
What is a deductible expense for UAE Corporate Tax?
As a general principle, expenditure may be deductible when it is incurred wholly and exclusively for the purposes of the Taxable Person’s business and is not capital in nature. The expense should also relate to the relevant Tax Period and be supported by appropriate documentation.
Common business expenses that may qualify for deduction, subject to the facts and applicable rules, can include:
- employee salaries, benefits and employment-related costs;
- office rent, utilities and normal administrative expenses;
- professional fees for accounting, legal, tax and other business services;
- marketing and advertising expenses incurred for the business;
- business travel and transportation costs;
- insurance and licence-related costs;
- repairs and maintenance expenses; and
- depreciation or amortisation recognised in accordance with the applicable accounting standards, subject to Corporate Tax adjustments.
The nature, purpose and supporting evidence for each expense should be reviewed before it is claimed.
Expenses with both business and personal purposes
Where an expense has both a business and a private or non-business purpose, the full amount should not automatically be deducted. The expenditure should be apportioned on a fair and reasonable basis, and only the portion relating to the business may be considered for deduction.
This can be relevant for expenses such as vehicles, mobile phones, travel, accommodation or other assets and services used partly for business and partly for personal purposes. Businesses should retain a clear explanation of the allocation method and the evidence supporting it.
Entertainment expenses
Entertainment expenditure can be subject to a specific limitation. In general, only 50% of qualifying entertainment, amusement or recreation expenditure incurred for customers, shareholders, suppliers or other business partners may be deductible.
This may include certain costs relating to meals, accommodation, admission, facilities or equipment used for entertainment. The correct treatment depends on the nature of the recipient and the purpose of the expense, so entertainment accounts should be reviewed carefully rather than applying one treatment to every meal or hospitality cost.
Interest expenditure
Interest and financing costs may be deductible, but the UAE Corporate Tax rules contain general and specific interest-deduction limitations. These rules can restrict the deduction of net interest expenditure in certain circumstances, including some related-party financing arrangements.
Businesses with loans, shareholder balances, group financing or significant bank facilities should review the interest rules before filing. They should also maintain loan agreements, repayment schedules and evidence of the commercial purpose of the financing.
Expenses that may be non-deductible
Certain expenditure is specifically restricted or disallowed for UAE Corporate Tax purposes. Examples may include:
- expenses that were not incurred for the purposes of the business;
- costs incurred in deriving Exempt Income, subject to the applicable rules;
- losses that are not connected with or do not arise from the business;
- fines and penalties imposed for violations of laws, other than certain compensation payments;
- bribes or other illicit payments;
- donations, grants or gifts made to organisations that are not Qualifying Public Benefit Entities;
- Corporate Tax itself; and
- other expenditure restricted under the Corporate Tax Law.
An accounting expense that is non-deductible normally needs to be added back when reconciling accounting income to Taxable Income.
Payments to owners, directors and related parties
Payments or benefits provided to owners, directors, Connected Persons or Related Parties require particular attention. The business should be able to demonstrate the commercial basis of the payment, the services or benefit received and, where relevant, that the amount is consistent with the arm’s length principle or market value requirements.
Contracts, invoices, timesheets, board approvals and benchmarking support may be relevant depending on the arrangement. Recording a payment in the accounts is not, by itself, sufficient evidence that the full amount is deductible.
Capital expenditure and depreciation
Amounts paid to acquire or improve long-term assets are generally capital in nature and are not normally deducted immediately as a routine operating expense. Instead, the cost may be recognised through depreciation or amortisation over the asset’s useful life, subject to the applicable accounting standards and Corporate Tax adjustments.
Businesses should distinguish repairs and maintenance from capital improvements and maintain a reliable fixed-asset register.
What records should a business retain?
A deductible-expense position should be supported by reliable records. Depending on the transaction, these may include:
- supplier invoices and contracts;
- proof of payment and bank statements;
- expense claims and approval records;
- details of the business purpose;
- calculations for any business and personal apportionment;
- loan agreements and interest schedules;
- related-party and Connected Person documentation; and
- the reconciliation from accounting profit to Taxable Income.
Corporate Tax records generally need to be retained for at least seven years following the end of the relevant Tax Period.
Practical review before filing the Corporate Tax Return
Before filing, businesses should review their profit-and-loss accounts and tax adjustments systematically. Particular attention should be given to entertainment, fines and penalties, donations, interest, owner or director payments, related-party transactions, personal elements, provisions and capital items.
The review should be completed before the return is submitted so that adjustments are supported and inconsistencies between the accounts, schedules and Corporate Tax Return can be addressed.
How Business Catalyst Consulting can help
Business Catalyst Consulting supports UAE businesses with the review of deductible and non-deductible expenditure, Corporate Tax calculations and return preparation. Our work is tailored to the business’s accounting records, transactions and applicable elections or reliefs.
Learn more about our UAE Corporate Tax services, review our Corporate Tax Return filing checklist, or read our guide to Corporate Tax filing for natural persons.
Need assistance reviewing your expenses before filing? Contact Business Catalyst Consulting to discuss your UAE Corporate Tax requirements.
Frequently asked questions
Are all expenses recorded in the accounts deductible?
No. Accounting expenses may require Corporate Tax adjustments. The purpose, nature and supporting evidence for each expense must be considered together with any specific restriction under the Corporate Tax rules.
Can a business deduct personal expenses paid through the company?
The personal portion is generally not deductible. Where an expense has both business and personal use, a fair and reasonable allocation should be made and documented.
Are client entertainment expenses fully deductible?
Qualifying entertainment expenditure for customers, shareholders, suppliers or other business partners is generally subject to a 50% deduction limitation. The exact treatment depends on the facts.
Can fines and penalties be deducted?
Fines and penalties imposed for violations of law are generally non-deductible, although the treatment of compensation for damages or breach of contract can differ.
How long should Corporate Tax expense records be retained?
Relevant records and supporting documents generally need to be retained for at least seven years following the end of the Tax Period to which they relate.
This article provides general information and does not constitute tax advice. The Corporate Tax treatment depends on the relevant facts, legislation, decisions and FTA guidance applicable to each business.
Official references: FTA Corporate Tax Guide – Determination of Taxable Income and FTA Corporate Tax Guide – Tax Returns.