Deductible Expenditure for Corporate Tax Purposes in UAE

This article outlines the rules and conditions for deductible expenditure in computing taxable income for corporate tax purposes. Whereas, the deduction is allowed for expenditure that is incurred wholly and exclusively for purposes of the taxable person's business or business activity unless specifically disallowed by the Corporate Tax Law. The expenditure must have a direct connection to the business and would not have been incurred if the person did not undertake the business activity. Personal expenditures or expenses unrelated to the business are not deductible.

Determining Accounting Income 

Accounting Income refers to the net profit or loss as per standalone financial statements prepared in accordance with accepted accounting standards in the UAE and Taxable Income is the Accounting Income adjusted for corporate tax purposes, including adjustments specified in the Corporate Tax Law and any implementing decisions.

Timing of Deductible Expenditure

Expenditure is deductible in the tax period in which it is incurred. For cash basis accounting, expenditure is considered incurred when it is paid. For accrual basis accounting, expenditure is considered incurred when the obligation to pay arises and it is irrevocably committed for payment.

Determining Capital Expenditure

Capital Expenditure is capital in nature, incurred for the enduring benefit of the business, it is not deductible as a direct expense. Instead, capital expenditure is typically recognized through depreciation or amortization over the economic life of the asset or benefit. As per Corporate Tax Law in UAE, Articles 30 and 31 specifically limit the deduction for Interest expenditure. Any expenditure that fails to meet the conditions will be disallowed and added back to a Taxable Person's Taxable Income if it was initially included in their Accounting Income. However, there are also instances where expenditure cannot be deducted.

The deduction is denied for expenditure that is not incurred for the Taxable Person's Business purposes, such as personal consumption. Deductions for expenditure related to the generation of Exempt Income are denied as per the Corporate Tax Law and losses unrelated to the Taxable Person's Business are also non-deductible. 

Read more: Deductible & Non-Deductible Expenses Under Corporate Tax in the UAE

Conditions for Allowing Deduction

Deduction is allowed only for expenditure that is wholly incurred in generating Taxable Income. Therefore, if an expenditure serves both the purpose of generating Taxable Income and another purpose, for instance, deriving Exempt Income or personal use, it must be apportioned accordingly. Hence, only the portion directly attributable to the derivation of Taxable Income is eligible for deduction for Corporate Tax purposes in UAE.

Whereas, the basis of apportionment depends on the nature of the expenditure. Some expenses have distinct components that can be clearly allocated between taxable and non-taxable uses. However, other expenditures may require a fair and reasonable judgement to determine the apportionment. When expenditure is only partly incurred for the purpose of generating Taxable Income, the apportionment should consider all relevant facts and circumstances of the Taxable Person's Business.

Avail the Services of Top Tax Consultants in the UAE 

To effectively determine deductible expenditures in compliance with the Corporate Tax Statute, Taxable Persons are advised to avail of the expert services of Corporate Tax Dubai. Therefore, contact us today and we shall be glad to assist you.