UAE Corporate Tax Deductions
A Taxable Person, under the recently announced UAE Corporate Tax (CT) Law, has been provided with certain tax deductions from their Taxable Income that are incurred by the Person during the relevant Tax Period.
But what is a tax deduction? As per the UAE CT Law, it refers to an amount of expenditure that can be subtracted from the total Taxable Income of a Taxable Person, while calculating the tax liability of such a taxpayer. Tax deductions reduce the Taxable Income of a Taxable Person and which in turn, lowers the tax liability. Tax deductions are legal incentives provided as per the provisions of the law and is deductible by the Taxpayers.
Article 28 – Deductible Expenditure
Article 28 of the UAE Corporate Tax Law lists down the various expenditures that can be claimed as deductions by a Taxable Person to reduce their Tax Payable, i.e., expenditure incurred wholly and exclusively for the purpose of the business. Hence, all expenditures that are legitimate in nature and incurred during the ordinary course of business to derive Taxable Income are deductible as per the UAE Corporate Tax Law.
There is an exception to the above as not all expenditure is deductible for computing taxable income, such as expenses which are in the nature of capital expenditure. For example: You bought a laptop of AED 5,000 during taxable period. During the same period, you spent AED 750 towards repairs and maintenance of that laptop. In this case only AED 750 is deductible as expense since the AED 5,000 is of capital nature.
Article 30 - General Interest Deduction Limitation Rule
Interest expenses are often used as a means of base erosion and profit shifting, i.e., BEPS, thus leading to tax avoidance. The entities claim interest deductions by excessive use of debt financing via intra-group transactions or Related Party transactions and in the process, they reduce their Taxable Income and avoid tax.
Article 30 of the UAE Corporate Tax Law provides for Limitation Rules on General Interest Deduction. A Taxable Person is eligible to claim net interest expenditure upto 30% of EBITDA after excluding exempt income.
Article 32 – Entertainment Expenditure
Entertainment Expenditure includes expenses incurred while receiving and entertaining the Taxable Person's clients, shareholders, suppliers, or other business partners which are not limited to expenses incurred on the meals, accommodation, transportation, admission fees, facilities and equipment used for entertainment, amusement, or recreation or any other expenditure that may be prescribed by the Minister.
Limit of claiming deductions for Entertainment Expenditure:
As per Article 32 of the UAE Corporate Tax Law, a Taxable Person can claim tax deduction of upto 50% (fifty percent) for any expenditure incurred on entertainment, amusement, or recreation during a Tax Period, subject to Article 28 of the UAE Corporate Tax Law, related to Deductible Expenditure.
The deductions offered under the UAE Corporate Tax Law play a pivotal role in shaping the financial landscape for businesses operating within the Emirates. By intelligently leveraging these deductions, companies can optimize their tax liabilities, stimulate growth, and enhance their competitiveness on a global scale.
Want to know whether your expenses can be claimed as deductible Expenditures under the UAE CT Law? Contact us or check out our Corporate Tax services
