UAE Corporate Tax

We know that The United Arab Emirates (UAE) Ministry of Finance has already published Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business in December, 2022 which provides the legislative basis for the implementation of UAE Corporate Tax.

UAE Corporate Tax is a federal tax and consists of 70 Articles.

Please read my detailed blog on UAE Corporate Tax here:

UAE Corporate Tax Law | Humayun Atif (CMA,CPA)

In this article we will discuss what are deductible expenses, non-deductible expenses and partially deductible expenses.

Definitions

Accounting Income

The accounting net profit or loss for the relevant Tax Period as per the financial statements prepared in accordance with the provisions of Article 20 of this Decree-Law.

Exempt Income

Any income exempt from Corporate Tax under this Decree-Law.

Deductible Expenses

All legitimate business expenses for the purposes of deriving Taxable Income will be deductible and in certain cases timing of the deduction may vary for different types of expenses and the accounting method applied.

For the purposes of calculating the Taxable Income for a Tax Period, no deduction is allowed for the following:

a) Expenditure not incurred for the purposes of the Taxable Person’s Business.

b) Expenditure incurred in deriving Exempt Income.

c) Losses not connected with or arising out of the Taxable Person’s Business.

d) Such other expenditure as may be specified in a decision issued by the Cabinet at the suggestion of the Minister.

All capital assets, expenditure would generally be recognised by way of depreciation or amortisation deductions.

Non-Deductible or Partially Deductible Expenses

Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. These expenses are categorized in:

• Non-deductible expenditure, and
• Partially deductible expenditure.

Non-deductible Expenditure

We will discuss elements of the UAE Corporate Tax under Article 33 which states certain expenses or payments which are not allowed and these are stated as below:

1. Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit Entity.
2. Fines and penalties, other than amounts awarded as compensation for damages or breach of contract.
3. Bribes or other illicit payments.
4. Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person.
5. Amounts withdrawn from the Business by a natural person who is a Taxable Person under paragraph (c) of Clause 3 of Article 11 of this Decree-Law or a partner in an Unincorporated Partnership.
6. Corporate Tax imposed on a Taxable Person under this Decree-Law.
7. Input Value Added Tax incurred by a Taxable Person that is recoverable under Federal Decree-Law No. (8) of 2017 referred to in the preamble and what replaces it.
8. Tax on income imposed on the Taxable Person outside the State.
9. Other expenditure as specified in a decision issued by the Cabinet at the suggestion of the Minister.

Partially Deductible Expenses

Tax purposes we need to scrutinize all those expenses which have both personal and business portions and these need to be apportioned according to the Corporate Tax regulations.

Entertainment Expenditure

Taxable Person shall be allowed to deduct 50% of any entertainment, amusement, or recreation expenditure incurred during a tax period.

These expenses should be incurred for the purposes of receiving and entertaining the Taxable Person’s customers, shareholders, suppliers or other business partners, including, but not limited to, expenditure in connection with any of the following:

• Meals.
• Accommodation.
• Transportation.
• Admission fees.
• Facilities and equipment used in connection with such entertainment, amusement or recreation.
• Such other expenditure as specified by the Minister.

Interest Expenditure

• A Taxable Person’s Net Interest Expenditure shall be deductible up to 30% of the Taxable Person’s accounting earnings before the deduction of interest, tax, depreciation and amortisation for the relevant Tax Period, excluding any Exempt Income under Article 22 of this Decree-Law. There are certain exemptions and conditions are also specified in Article 30.

There are specific Interest deduction limitation Rule are as below:

1. No deduction shall be allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:
2. A dividend or profit distribution to a Related Party.
3. A redemption, repurchase, reduction or return of share capital to a Related Party.
4. A capital contribution to a Related Party.
5. The acquisition of an ownership interest in a Person who is or becomes a related party following the acquisition. There are certain exemptions and conditions as specified in Article 31(2) & 31 (3).

Recommended Reading:  https://accountingblogger.com/uae-value-added-tax-vat/

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com