The United Arab Emirates (UAE) has recently enacted the UAE Federal Law No. 7 on Tax of Corporations and Businesses for the fiscal year 2022 setting out the UAE corporate tax system that will apply to all corporations in the UAE, but primarily concerning accounts change. This article is intended to offer a general insight into the UAE’s corporate tax regime with the main emphasis made upon the peculiarities of Deductible vs. Non-Deductible Expenditure. Analyzing these distinctions helps businesses understand their taxation responsibilities and apply for best possible deductions.
Corporate Tax Guidelines for Tax Deductions
Deductible expenditure can be defined as an amount that may be subtracted from the total amount of taxable income of any organization with the aim of reducing the payable tax. As per the UAE Corporate Tax Law, all reasonable, actual and necessary expenses incurred wholly and exclusively for the purpose of carrying on the trade and deriving the accessible income will be considered as allowable expenses . In this case, the timing of the deduction may differ depending on the type of expense and the selected accounting method.
Common Business tax deductions
Some of the common deductible expenses for corporations in the UAE include:
- Salaries and wages
- Rent and utilities
- Repairs and maintenance
- Provisions for bad debts
- Depreciation and amortization
Interest expenses which can go up to 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA).
Common Deductible Expenses for Corporations in the UAE
| Expense Category | Examples |
|---|---|
| Salaries and wages | Employee compensation, bonuses, and benefits |
| Rent and utilities | Office space rent, electricity, water, and internet |
| Repairs and maintenance | Building and equipment repairs, maintenance contracts |
| Provisions for bad debts | Estimated losses from uncollectible accounts |
| Depreciation and amortization | Capital asset depreciation, intangible asset amortization |
| Interest expenses | Interest paid on business loans and credit |
Non-Deductible Expenses: Understanding the Non-allowable costs
Business expenses which cannot be claimed as deductions under the income tax act from the total gross income of the companies are called non-deductible expenses. Such expenses are referred to as non-allowable costs and have to be added to the accounting income when determining the taxable income. Some examples of non-deductible expenses include:
Bribes administrative sanctions, more specifically the fines, and penalties (except for non-performance or breach of contract).
Money, gifts, grants, or donations received by any organization that is not deemed by the act to be a public benefit organization
Payment of dividends and other profits by the companies to their shareholders
Costs which are not wholly and exclusively for the taxpayer’s trade
Common Non-Deductible Expenses for Corporations in the UAE
| Expense Category | Examples |
|---|---|
| Bribes | Illegal payments made to secure business advantages |
| Penalties and fines | Fines imposed for violating laws or regulations |
| Gifts, grants, or donations | Contributions to non-qualifying public benefit organizations |
| Distributions of dividends and profits | Profit distributions to shareholders |
| Expenses not incurred for business needs | Personal expenses charged to the company |
Categorizing Business Expenses for Tax Purposes
When it comes to taxes, it is very important to clearly assign business expenses in order to avoid misrepresentation and to get the most out of deductions. It is crucial for companies to keep original records for every expense incurred with documents including invoices, receipts or contracts depicting the expenditure properly classified by category of expense. This will not only ease the tax filing process but will also do so with the added benefit of having evidence in case of an audit or a disagreement.
FAQs
What qualifies as deductible expenditure?
Expenditure incurred wholly and exclusively to carry on a business is regarded as deductible expenditure.
What expenses are non-deductible for corporate tax?
Non-deductible expenses include Bribes, Penalties, and Fines; Gifts or grants or donations to a non-qualifying public benefit organisation; Dividends and other profits; Expenditures not wholly and exclusively for the trade.
How do I categorize business expenses for tax purposes?
Business expenses should be grouped in some way, usually according to their nature and the reason for incurring the expenses. It is recommended that every company should open a unique account related to every class of expenditure that has been claimed and should keep documents and evidence for such claims.
What are the common deductible expenses for corporations?
Corporations’ usual deductible expenses include salary and wages, rental expenses and utilities, repair and maintenance costs, provision for bad debts, depreciation, amortization, and interest costs (maximum of 30% of EBITDA).
Can entertainment expenses be deducted from corporate tax?
Unrestricted entertainment expenses are allowable but limited to 50% of the cost if for business purposes i.e. client entertaining or employee parties.
Conclusion:
managing the difference between deductible vs non-deductible expenses is crucial for corporations that seek to maximize their corporate tax shield while at the same time following the legal requirements of corporate taxation. By following the expenses’ classification and respecting the provisions of the UAE Corporate Tax Law, organizations can be confident they are claiming all possible deductions while being compliant.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.
