Corporate Tax & Expenses: An Overview
The UAE corporate tax law dismisses or prohibits certain expenses to be deducted. This is done so that a form of relief is given to companies in UAE for the purpose of generating income that is taxable and looking into situations of possible abuse or unfair and exorbitant deductions. On the other hand, the UAE Corporate tax law also lays down expenses that shall be deductible.
Deductible Expenses Under Corporate Tax Law
Interest Capping Regulations
Although a few reserves of share capital or equity may be needed under the company regulations in the UAE, there is flexibility in terms of how business owners want to invest in their business.
Financing costs as well as interest are regarded as an expense under the corporate tax law and shall, therefore, be deductible. However, the deductibility of these factors may give rise to opportunities that disintegrate the base of the UAE corporate tax regime unless suitable steps are taken.
The Ministry of Finance Public Consultation document lays out the perfect example of this- cutting of profits that are taxable through the utilization of deductible interest payments, wherein the receiver of the interest income is not imposed with a tax (for example a free zone person or an individual shareholder).
You may also read: UAE Corporate Tax For Charities – An Overview
To prevent the exploitation of different tax treatments such as equity and debt, the amount of net interest will be capped by the corporate tax regime in the UAE. This will be done by deducting 30% of the earnings of a business before the interest, depreciation, tax and amortization. This is subject to OECD’s Base Erosion and Profit Shifting Project Action 4, EBITDA rules, which have already been applied by countries around the world.
Furthermore, to decrease organizational or management burden, businesses may be permitted to deduct a particular amount from the net interest spending, regardless of the deductibility limit for interest set in the EBITDA rules.
The interest capping rules set by the UAE corporate tax law will not apply to banks and other businesses such as insurance and entities that are involved in the regulation of finances. This is done keeping in mind that different businesses have varying capital needs and risks involved. However, businesses that are undertaken by natural persons will also not fall under the scope of the interest capping rules.
Businesses that are composed of a consolidated group are given special consideration and can apply a different threshold for interest capping, based on the overall position of the group. Moreover, interest paid on any borrowings done by related parties, wherein such borrowings are from intra-group transactions like paying a dividend or capitalizing a group company), such interest will only be deductible if the company has a legitimate reason for taking the loan.
This commercial reason will only be considered valid if the lender from the related party is subject to corporate tax in the UAE (or an equal tax) of a rate of at least 9% on the income earned on interest.
Non-Deductible Expenses Under Corporate Tax Law in UAE
Any payments made by the related party to a Free Zone Person that is taxed at a 0% corporate tax rate on the receipt of the income shall not be deductible under the corporate tax in UAE. However, the related party can claim a deduction in case the payment is allocated to the free zone person of a mainland branch. Only 50% of the expenses incurred to please customers, clients, shareholders, business partners and suppliers will be allowed to be deductible under the corporate tax. This is because such kinds of expenses oftentimes have a non-commercial or personal reason.
Other specific expenses such as management penalties, VAT recovery and donations given to an entity that is not an authorized charity or public benefit organization shall not be deductible under the corporate tax in UAE.
Expert Corporate Tax Advisory Services in UAE at Corporate Tax UAE
The experts at Corporate Tax UAE can provide you with ample corporate tax advice on the filing as well as planning and management of corporate tax for your business in Dubai and all-around UAE while helping you determine the benefits you can get out of deductions.
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Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.