Understanding Non-Deductible Expenses Under Corporate Tax

In the realm of corporate finance, understanding non-deductible expenses is paramount for effective tax planning and financial management. Provisions within the UAE Corporate Tax Law lay out guidelines dictating which expenses can be offset against a business’s taxable income. Article 28 of Federal Decree Law No. 47 of 2022 underscores the principle that a business expense is eligible for deduction only if it is solely and exclusively incurred for business purposes.

In this blog, we embark on a detailed exploration of non-deductible expenses under UAE corporate tax, shedding light on the intricacies of what can and cannot be written off in the pursuit of optimizing financial strategies. But before that, let’s establish a foundational understanding. All business expenditures not of a capital nature are, indeed, deductible.

 

Objective of Non-deductible Expenses In Corporate Tax Law

Non-deductible expenses in UAE corporate tax play a crucial role by preventing excessive deductions, ensuring only essential costs related to generating taxable income qualify for relief. The primary objective of rules pertaining to the deductibility of expenditures is to ensure reasonable and justifiable expenses, prevent personal or extravagant use, and guard against potential abuse and fraudulent claims. 

Overall, non-deductible expenses contribute to determining taxable income, fostering fairness, and upholding the integrity of the UAE corporate tax system.

 

Key Elements to be Noted

Businesses are advised to maintain comprehensive records as evidence linking expenses to their operations. It is imperative to ensure an accurate allocation of expenses between business and non-business activities. Furthermore, a thorough examination of expenditures is necessary to confirm proper recognition, thereby avoiding the need for taxable income adjustments during assessments.

 

Non-Deductible Expenditures

Non-deductible expenditures, under UAE corporate tax legislation, refer to a broad range of transactions that cannot be deducted from a taxable person’s income. Article 33 provides a breakdown of these specified expenses. These include:

1. Donations, Grants, and Gifts: Donations, grants, or gifts made to entities not meeting the criteria of qualifying public benefit entities are non-deductible.
2. Fines and Penalties: Except for compensation linked to damages or contract breaches, fines and penalties fall under the non-deductible expense category.
3. Bribes or Illicit Payments: Any unlawful payments or bribes are considered non-deductible expenses.
4. Dividends, Profit Distributions: Payments resembling dividends or profits to the owner of the taxable person are non-deductible.
5. Withdrawals from Business: Withdrawals made by a partner in an unincorporated partnership or a natural person taxable under Art. 11(3)(c) are non-deductible.
6. Corporate Tax: The corporate tax imposed on the taxable person is non-deductible.
7. Input VAT under Federal Decree-Law No. 8 of 2017: Recoverable input VAT paid by the taxable person is non-deductible.
8. Income Tax Imposed Outside the State: Any income tax imposed outside the state is considered non-deductible.

 

Exceptions to General Deductibility Rule

UAE corporate tax regulations present a complex scenario where exceptions to the typical deductibility rule become crucial factors in molding the financial strategies of businesses. These include:

• Expenditure not incurred for the business of the taxable person.
• Expenditure incurred in deriving exempt income.
• Losses not connected with or arising out of the taxable person’s business.
• Deduction is possible for expenditure incurred for multiple purposes if identifiable part is exclusively for deriving taxable income, and appropriate proportion of unidentified part is determined on a fair basis.
• If the net interest expenditure surpasses AED 12 million, it is deductible based on the higher of 30% of accounting earnings (EBITDA, excluding exempt income) or AED 12 million.
• Interest on a Related Party loan is non-deductible unless the Taxable Person demonstrates the absence of Corporate Tax advantage in specific dealings.
• Taxable person can deduct 50% of entertainment costs, encompassing meals, accommodation, transportation, admission fees, and related facilities.

 

Conclusion

Business owners must be aware of tax exceptions for effective annual budget planning. Caution is advised in deducting costs to avoid severe fines for non-compliance. Engaging corporate tax consultants is vital for understanding tax losses and expenses, ensuring compliance with UAE tax laws, and potentially saving resources.

How Can TCA Help You

Our experienced team of tax professionals at TCA can assist you in navigating the complex tax laws in the UAE to minimize your tax liabilities and ensure complete compliance. We thoroughly examine the business expenses to guarantee complete adherence to UAE CT law. Determining the degree to which the costs incurred are covered by the regulations controlling deductible expenses. Also, we analyze the risk of not deducting expenses and how it would affect the corporate tax liability.

Feel free to contact us to learn more about Deductible and Non-deductible expenses under corporate tax UAE!!