Allowable Deductions Under UAE Corporate Tax Law

Tally Solutions | Updated on: April 20, 2023

General interest deduction limitation
Specific interest deduction limitation rule
Entertainment expenditure
Non-deductible expenditure

A taxable person can get some deductions on his income during a tax period provided he meets the requirements as directed in the corporate tax law by the Authority.

A deduction is an amount that can be deducted from the taxable income during the tax liability calculation phase. This decreases how much tax the taxable person owes to the government. Note that tax deductions fall under legal incentives and have been provided by the law. The UAE corporate law’s article 28 examines deductible expenditure.

5 Things To Know About UAE Corporate Tax

Corporate Tax Limit and Applicability in UAE

General interest deduction limitation

The general interest deduction limitation for corporate tax deductions is outlined in article 30 of the UAE corporate tax law. A taxable person can claim the general interest deduction, by deducting a maximum of 30% of their earnings before EBITDA. This deduction will be done as net interest expenditure.

The net interest expenditure is calculated by subtracting taxable interest income received by the taxable person from the interest expenditure during the tax period. The taxable interest income should also include the amount of net interest expenditure that has been carried forward from earlier.

Note that you should not include disallowed interest expenditure as per the UAE corporate tax provisions.

Limit of claiming deductions from net interest expenditure of a taxable person

A taxable person can deduct up to a maximum of 30% of their net interest expenditure from their EBITDA for the tax period specified. This excludes the exempt income as specified in the UAE corporate tax law’s article 22.

Threshold set by the minister to not be subject to general interest deduction limitation rule

The general interest deduction limitation rule will not apply if the taxable person’s net interest expenditure for the particular tax period is within the threshold outlined by the Minister.

Carry forward of disallowed net interest expenditure

It is possible to carry forward disallowed net interest expenditure during deduction in the next 10 tax periods. You must ensure the order is followed during the carry-forward process.

Non-applicability of interest capping rules

Claiming deductions does not apply to an insurance provider, a bank, a natural person who is conducting business activities inside the state, and anyone else who is specified by the Minister.

Person associated by means of ownership or control

Anyone who comes under this category is required to get all his financial statements consolidated as per the accounting standards. The Minister can decide if such a taxable person applies to the net interest expenditure deduction or not.

Specific interest deduction limitation rule

The UAE corporate tax law has some provisions for interest expenditure deductions by a taxable person who has obtained a loan from a related party.

Exception in deduction in case of related party

If a taxable person has obtained any loan from a related party and any of the following is true, then he is not eligible for a deduction on interest expenditure.

If any profits or dividends are paid to the related party.
If the capital contribution to the related party occurs.
If the taxable person has transferred his shares to the related party because the latter will make a share capital return, repurchase them, reduce capital, or will be involved in redemption.
If the ownership stake is purchased from someone from whom an acquisition will take place, thereby making them a related party.

As per the corporate tax law, if the taxable person is involved in any of the above but shows proof that he did not do it to gain a corporate tax advantage, he may be allowed deductions in interest expenditure. Moreover, in the case that it falls in a foreign jurisdiction at a rate of 9%, it will not fall under the corporate tax advantage as per the law.

Entertainment expenditure

The entertainment expenditure involves all the expenses incurred when entertaining the taxable person’s suppliers, clients, etc. It includes expenses such as transportation, meals, facilities, accommodation, equipment, admission fees, and anything else specified as an entertainment expense by the Minister.

Limit of claiming deductions for entertainment expenditure

A taxable person can claim a deduction of up to 50% for entertainment expenditures during a tax period. The person can claim it for amusement, entertainment, or recreation during the relevant tax period. This has been specified per article 28 of the UAE corporate tax law, which delves into the deductible expenditure specifics.

Non-deductible expenditure

Non-deductible expenditures are those where deductions on a taxable person’s income are not allowed as per the UAE corporate tax law. Article 33 of the UAE corporate tax law outlines transactions that are considered a non-deductible expenditure. The following transactions cannot be used to claim any type of deductions for a taxable person.

A corporate tax that been levied on a taxable person by the UAE corporate tax law.
Gifts that have been given to a corporate entity that don’t fall under the Qualifying Public Benefit Entity.
Fines and penalties apart from the ones paid due to violations in the contract are categorized as non-deductible expenditure.
Donations that have been given to a corporate entity that is not a part of the Qualifying Public Benefit Entity.
Any sum that a natural person withdraws as per Clause 3 of Article 11 in the UAE Corporate Tax Law. It also applies to the Unincorporated Partnership that has arisen from a business.
Any type of illegal payments and bribes fall under non-deductible expenditure.
A tax that has been levied on a taxable person’s income who is outside the UAE.
Grants that have been given to a corporate entity that does not fall under the Qualifying Public Benefit Entity.
Any payments made to the taxable person’s owner such as dividends are categorized under non-deductible expenditure.
The input value added tax that has been paid by the taxable person and is eligible for reimbursement.
Any payments linked to paying the owner such as profit distributions fall under non-deductible expenditure.
Any expenditure that does not fall under any of the categories above but has been recommended by the Minister.