Understanding corporate tax deductions in Dubai is crucial for businesses aiming to optimise their financial strategies. UAE has already established a solid presence as a global economic hub. Hence, the knowledge of tax strategies has become vital to ensuring long-term business success.
The UAE’s corporate tax regime came into effect in 2023 to improve the country’s fiscal policy to international standards and practices. The corporate tax aims to promote transparency, reduce harmful tax practices, and align with global efforts to combat tax avoidance.
This comprehensive guide provides an in-depth view of corporate tax deductions in the UAE. Every business, regardless of size, must understand how to leverage tax deductions to optimise its overall business strategy and financial performance.
Understanding Tax Deductions in UAE Corporate Tax Law
In the context of UAE corporate tax law, deductions are legal incentives provided to businesses, allowing them to reduce their taxable income. Corporate tax deductions decrease the overall corporate tax liability of a business, resulting in monetary gains for a business.
Tax deductions are significantly important for a business and serve multiple purposes:
- Reducing tax liability: By lowering taxable income, deductions directly decrease the amount of tax a business must pay.
- Encouraging certain behaviours: The government can motivate businesses to engage in activities that are deemed beneficial to the economy or society through deductions.
- Reflecting true profitability: Deductible expenditures paint a more accurate picture of a company’s financial health by accounting for necessary expenses.
- Promoting fairness: By deducting legitimate business expenses, the tax system aims to tax only the actual profit generated.
General Principles of Deductible Expenditure
According to Article 28 of the Corporate Tax in UAE Law, expenses are generally deductible if they meet the following criteria:
- Wholly and exclusively incurred for business purposes: The expense must be entirely related to the business’s operations and not for personal benefit.
- Not of a capital nature: Capital expenses are typically not immediately deductible but may be depreciated or amortised over time.
- Deducted in the tax year they were incurred: The expenses must be dedicated in the same fiscal year they were incurred, following the accrual accounting principle.
These criteria are necessary to determine which expenses qualify for tax deductions under UAE corporate tax law. Businesses must understand these requirements to claim all eligible deductions while remaining compliant with tax regulations.
Additionally, the law provides for the deductibility of expenses incurred for dual purposes. In such cases:
- Any identifiable portion of the expense that is wholly and exclusively for business purposes is deductible.
- For unidentifiable components, an appropriate share can be deducted based on a fair and reasonable calculation.
Types of Deductible Expenses
Business-Related Expenditure
Expenses that are legitimate and incurred while conducting regular business to derive taxable income are generally deductible. This category encompasses a wide range of expenses, including:
- Salaries and wages: Compensation paid to employees, including bonuses and benefits.
- Rent for business premises: Costs associated with leasing office space, warehouses, or other business facilities.
- Utility costs: Expenses for electricity, water, internet, and phone services used for business purposes.
- Office supplies: Expenditures on stationery, printing materials, and other consumables used in day-to-day operations.
- Marketing and advertising expenses: Costs related to promoting the business, including digital marketing, print ads, and promotional events.
- Professional fees: Payments for legal, accounting, consulting, and other professional services such as corporate tax advisors.
- Travel expenses: Business-related travel costs, including transportation, accommodation, and meals.
- Maintenance and repairs: Costs associated with keeping business assets in good working condition.
- Training and development: Expenses incurred for employee training programs and skill development initiatives.
All these expenses must be directly related to generating the taxable income. If such expenses are incurred for personal use or benefit, they are not legally deductible. You must have proper documentation and keep accurate records to verify these corporate tax deductions in case of an audit.
Interest Expenses
The UAE corporate tax law allows interest to be deducted from the taxable income, subject to certain limitations. Of course, there are specific rules for interest deductions to prevent base erosion and profit shifting (BEPS) through excessive debt financing.
Deductible interest expenses may include:
- Interest on business loans
- Interest on credit lines or overdrafts used for business purposes
- Finance charges on financial leases
- The interest component of Islamic finance arrangements
However, it’s crucial to note that whether interest is considered a deductible expense or not depends on the general and specific interest limitation rules.
Entertainment Expenses
Entertainment expenses, including those incurred for client entertainment, are partially deductible in Dubai. Article 32 of the Corporate Tax Law allows for a deduction of up to 50% of entertainment, amusement, or recreation expenses incurred during a tax period for business purposes.
Deductible entertainment expenses may include:
- Meals with clients or business partners
- Tickets to sporting events or concerts for business guests
- Costs associated with hosting corporate events or parties
- Travel and accommodation for business-related entertainment activities
While these expenses are partially deductible, it’s essential to maintain detailed records of the business purpose and attendees for each entertainment expense. The Ministry of Finance (MoF) may require these details to justify the deductible expenses.
Limitations and Restrictions on Deductions
There are certain limitations and restrictions put by the MoF on various interest deductions. Let’s look at them.
General Interest Deduction Limitation Rule
The UAE has put a cap on deductible interest rates to prevent excess debt financing and ensure transactions are commercially valid. This rule, aligned with the OECD’s BEPS Action Plan 4, aims to limit base erosion through interest deductions. Under this rule:
- Net Interest Expense (NIE) up to 30% of taxable income, excluding any exemption before interest, taxes, depreciation, and amortisation (EBITDA), is deductible.
- The limitation rule is only applicable if the interest expenditure exceeds the De Minimis Limit, i.e., AED 12 million.
- Disallowed NIE can be carried forward for up to ten subsequent tax periods.
Calculation of Net Interest Expense:
NIE = Interest Expense – Taxable Interest Income
The EBITDA for this purpose is calculated as follows:
EBITDA = Taxable Income + NIE + Depreciation + Amortisation
It’s important to note that this limitation does not apply to:
- Banks
- Insurance providers
- Natural persons conducting business or business activities
- Other entities, as determined by the Minister
Specific Interest Deduction Limitation Rule
Additional restrictions apply to interest expenses incurred on loans from a related party. No deduction is allowed for interest on loans used for:
- Dividend or profit distribution to a related party
- Share transfers for redemption, repurchase, or capital reduction
- Capital contribution to a related party
- Acquisition of ownership stake in a person who becomes a related party
A taxable person can claim deductions on the aforementioned expenses if they can prove that the transactions were legit and not done for the sake of corporate tax deduction. Also, the interest rate must be at most 9% to enjoy the corporate tax deduction benefits.
Non-Deductible Expenditure
There are many expenses that might seem deductible expenditures but are not given that status by the UAE corporate tax law. Article 33 provides a comprehensive list of non-deductible expenditures, which include:
- Donations, grants, or gifts to non-qualifying public benefit entities
- Fines and penalties, except for costs or fees paid as compensation in case of damages or contract breaches
- Bribes and illegal payments
- Dividends or profit distributions to owners of the taxable person
- Withdrawals from the business by an individual who is a taxable person as per Clause 3 of Article 11 or a partner in an unincorporated partnership
- Corporate tax levied by the UAE CT law on a taxable income
- Input VAT eligible for recovery under Federal Decree-Law No. 8 of 2017
- Foreign income tax levied on the taxable person outside the UAE
- Any additional expenditures specified by a Cabinet decision upon the Minister’s recommendation
Understanding these non-deductible expenditures is crucial for companies to avoid claiming disallowed expenses. This might potentially result in penalties or additional scrutiny from tax authorities.
<H2> Special Considerations for Tax Deductions
Depreciation and Amortisation
The UAE Corporate Tax Law does not offer detailed guidance regarding depreciation and amortisation. However, these expenses are generally considered deductible, depending on specific rules and regulations.
Depreciation allows businesses to spread out the cost of capital assets, like equipment or office spaces, over several years. It shows how these assets gradually lose their value over time due to wear and tear or by becoming outdated.
Key points to consider for depreciation and amortisation:
- The depreciation and amortisation rates and methods should follow the accounting standards and reflect the true economic depreciation of assets.
- Different asset classes may have different depreciation rates and methods.
- Intangible assets, such as patents or goodwill, may be subject to amortisation over a specific period of time (several years).
Businesses should maintain detailed asset registers and documentation to support their depreciation and amortisation claims.
Charitable Contributions
The UAE corporate tax law aims to encourage corporate social responsibility among Emiratis. However, it must also ensure that deductions are only claimed on legitimate charitable activities. Key points include:
- Donations to qualifying public benefit entities may be deductible.
- Contributions to non-qualifying entities are not generally considered deductible contributions.
- The definition of a “Qualifying Public Benefit Entity” plays a key role in deductibles and may be subject to specific criteria set by the tax authorities.
Businesses should carefully verify the status of recipient organisations and maintain proper documentation for all charitable contributions to ensure deductibility.
Net Operating Losses
If a company is experiencing net operating losses, it can claim to offset tax losses against taxable income of subsequent tax periods. This provision can be particularly beneficial for start-ups or businesses in cyclical industries. Key aspects of the loss carry-forward provision include:
- Set-off is limited to 75% of taxable income in any given tax period.
- Losses can be carried forward indefinitely, providing flexibility for businesses to utilise accumulated losses over time.
- Specific rules apply to loss transfers between group entities, allowing for some level of loss sharing within corporate groups.
Restrictions on loss utilisation:
- Losses incurred before the commencement of the UAE CT regime cannot be claimed.
- Losses incurred before an entity became a taxable person under the CT Law are not eligible for carry-forward.
- Losses from exempt income or activities that do not fall under the CT categories cannot be offset against taxable income.
Strategies for Optimising Tax Deductions
To maximise the benefits of corporate tax deductions in the UAE, businesses should consider the following strategies:
- Maintain accurate records: Proper documentation is mandatory for successful deduction claims. Implement strict accounting systems and maintain detailed records of all business expenses, including receipts, invoices, and proof that the expense was business-related (where necessary).
- Plan interest expenses: Carefully plan financing arrangements to optimise interest deductions within the prescribed limits. Consider how both general and specific interest limitation rules might affect your overall debt financing.
- Review entertainment expenses: Make sure that entertainment costs are properly categorised and claimed within the 50% limit. Maintain detailed logs of business-related entertainment activities.
- Assess capital vs. revenue expenditure: Carefully analyse to create distinctions between capital and revenue expenses to ensure proper treatment. Develop clear policies for classifying expenses and consult with tax professionals when in doubt.
- Utilise loss carry-forward provisions: Develop strategies to use accumulated tax losses in future periods effectively. Consider the 75% limitation when projecting future tax liabilities and cash flows.
- Consider group relief: Try to find opportunities to distribute losses among qualifying group entities. Understand the conditions for group relief and structure group operations accordingly.
- Stay informed: Keep up-to-date with changes in tax laws and regulations that may affect your UAE corporate tax law deduction eligibility. Regularly review tax circulars and guidance issued by the MoF.
- Optimise depreciation strategies: Develop a comprehensive fixed asset management policy that aligns with accounting standards and tax regulations. Consider how different depreciation methods impact tax liabilities over time.
- Manage charitable contributions: Set up a corporate contribution policy that aligns with business goals and ensures charities are done to qualifying entities to optimise corporate tax-deductible expenses.
- Conduct regular tax health checks: Review your tax status and deduction claims regularly to ensure compliance with UAE laws and regulations while identifying areas for optimisations
- Leverage technology: Implement tax management software to automate expense tracking, categorization, and reporting. This can help in identifying deductible expenses more efficiently and reduce the risk of errors.
- Train key personnel: Ensure that finance teams, managers, and other relevant staff are well-versed in the principles of tax deductions and keep them updated on any changes in tax laws.
- Consider timing of expenses: Make some expenses as per the timing to maximise their tax benefit. This may involve making some expenses sooner or later based on your company’s tax position.
- Review transfer pricing arrangements: For multinational entities, ensure that intercompany transactions are in compliance with the UAE CT law so they remain eligible for deductible claims.
- Explore industry-specific deductions: Some industries may have specific deductions or incentives. Research and identify any sector-specific tax benefits that may apply to your business.
Conclusion
Understanding and effectively utilising corporate tax deductions is essential for businesses operating in the UAE. By claiming the right deductions, you can increase your company’s profit and optimise your tax position while remaining compliant.
The corporate tax environment in the UAE is likely to evolve further as the authorities respond to global tax developments. Staying informed about these changes and their implications will be crucial for maintaining tax efficiency.
Partnering with experienced tax professionals can provide valuable insights and ensure that your company’s tax strategy aligns with business objectives and legal requirements. Avyanco, with its experienced team of tax advisors, can help interpret complex tax rules, identify opportunities for optimization, and mitigate risks associated with tax compliance.
Tax deductions offer opportunities to reduce tax liabilities, so they should be approached with diligence and integrity. Remember that effective tax management is an integral part of the overall business strategy.
The end goal is to create a sustainable, compliant, and growth-oriented tax strategy that supports your overall business objectives in the UAE market. And Avyanco Auditing, a leading accounting and auditing firm in Dubai, is here to assist you at every step.
Want to optimise your corporate tax health today? Contact us for a free tax session now!
