Businesses in Dubai face the challenge of ensuring compliance with the UAE’s corporate tax system, especially when it comes to identifying which expenses can be deducted. Misunderstanding tax-deductible expenses could lead to overpaying taxes or penalties for non-compliance.
The UAE’s Corporate Tax Law, specifically Article 28 of the Federal Decree-Law No. 47 of 2022, offers clear guidelines on allowable deductions, helping reduce taxable income and increase profitability.
In this article, we cover key deductible expenses, disallowed deductions, and practical strategies to help your business remain compliant while benefiting from available tax incentives.
At Now Consultant, our tax advisors will help you in applying the strategies to get the actual benefit of corporate tax deductions for your business in the UAE.
What Is a Tax Deductible Expense?
In the UAE’s corporate tax system, tax-deductible expenses allow businesses to reduce their taxable income, which lowers the overall tax they owe. These deductions provide financial benefits to businesses and reflect their true profitability by accounting for necessary operational costs.
According to Article 28 of the UAE Corporate Tax Law, expenses are considered deductible if they are wholly and exclusively incurred for business purposes. This means the expense must be directly related to the company’s operations and not for personal use.
Types of Deductible Expenses
The following are the types of deductible expenses in the UAE corporate tax:
Business-Related Expenses
Expenses that arise during the normal operation of a business and are aimed at generating taxable income are tax-deductible. These expenses include:
Salaries and Wages: Payments made to employees, including bonuses and additional benefits.
Rent for Business Premises: Costs of leasing offices, warehouses, or other business spaces.
Utility Costs: Payments for electricity, water, internet, and phone services used for business operations.
Office Supplies: Purchases of stationery, printing materials, and other items required for daily operations.
Marketing and Advertising: Spending on promotional activities like digital marketing, print ads, or events to market the business.
Professional Fees: Payments for services such as legal, accounting, consulting, or tax advisory.
Travel Expenses: Costs related to business trips, including transportation, accommodation, and meals.
Maintenance and Repairs: Costs for maintaining and repairing business assets.
Training and Development: Expenses for staff training and skill improvement programs.
To be tax-deductible, these expenses must directly relate to business activities aimed at generating taxable income. It is important to keep accurate records and documentation to support these deductions in case of an audit.
Interest Expenses
Under UAE corporate tax laws, businesses can deduct interest expenses, but there are limitations. This is to avoid practices like base erosion and profit shifting through excessive debt. Deductible interest expenses include:
- Interest on business loans
- Interest on credit lines or overdrafts used for business
- Finance charges on financial leases
- Interest components of Islamic finance arrangements
It is important to follow the general and specific rules on interest deduction to ensure compliance.
Entertainment Expenses
In Dubai, businesses can deduct a portion of their entertainment-related costs under Article 32 of the Corporate Tax Law. Expenses for activities like entertainment, amusement, or recreation related to the business are eligible for a 50% deduction.
Examples include:
- Meals with Clients or Business Partners
- Tickets for Business-Related Sporting Events or Concerts
- Corporate Events or Parties
- Travel and Accommodation for Business Entertainment
Businesses must maintain detailed records of these expenses, including the purpose and the attendees involved, as the Ministry of Finance may request this information to verify the deductions.
Tax Deductions For Business Under Corporate Tax Law In UAE:
In the UAE, the Corporate Tax Law offers various opportunities for businesses to claim tax deductions, helping to reduce their taxable income. Deductions are allowed on expenses that are incurred wholly and exclusively for business purposes, provided these meet the criteria set out by the Federal Tax Authority (FTA). Some of the key categories of deductible expenses are:
1. General Business Expenses
Expenses directly related to generating business income, such as costs for goods, employee salaries, and benefits, are deductible. Any expense that contributes to a company’s ongoing operations, as long as it is used for business purposes, is considered deductible.
2. Depreciation of Assets
Companies can claim deductions for the depreciation of tangible and intangible assets, including property, machinery, and equipment. The depreciation must be calculated using methods approved by the FTA, ensuring it aligns with business practices and accounting standards.
3. Interest and Financial Costs
Interest on loans and other financial costs can also be deductible, but they are subject to certain limitations. The UAE Corporate Tax Law allows businesses to deduct a portion of their interest expenses, provided these are aligned with the business’s operational objectives.
4. Bad Debts and Provisions
Provisions for bad debts can be deducted if the debts are written off as uncollectable, as long as reasonable attempts have been made to recover the debt. Companies should maintain adequate documentation supporting the process of debt collection.
5. Research and Development
Expenses related to research and development (R&D) that focus on improving business operations, developing new products, or enhancing current services are also eligible for deduction. This deduction is particularly valuable for businesses involved in innovation.
6. Employee-Related Costs
Salaries, wages, bonuses, and other employee benefits are deductible if they are related to the business and documented in an accurate manner. Additionally, businesses may claim deductions on staff training and development costs.
7. Legal and Professional Fees
Legal and consultancy fees related to business activities can also be deducted under the UAE’s corporate tax framework. This includes costs for professional advice, audits, and legal proceedings, as long as they are mandatory to business operations.
These deductions offer significant advantages to companies operating in the UAE, helping them lower their tax liabilities and improve profitability.
Disallowed Corporate Tax Deductions
The UAE corporate tax law outlines several expenses that are explicitly disallowed for the deduction. The following are the disallowed corporate tax deductions:
- Income that is exempt from taxation.
- Capital-related expenditures.
- Fines and penalties that a business pays.
- Dividends or profits that have been distributed.
- Bribes or any unlawful payments.
- Donations, except those made to a qualified Public Benefit Entity.
- Recoverable input VAT.
- Personal or non-business-related expenses.
- Any additional expenses specified by the Cabinet Minister.
- Taxes imposed outside the UAE.
Strategies for Maximizing Tax Deductions
In order to get the actual benefits of corporate tax deductions in the UAE, businesses can use the following strategies:
Keep accurate records: Proper documentation is a key to claiming deductions. For that purpose, a reliable accounting system must be used, and detailed records of all business expenses, including receipts and invoices must be kept.
Plan interest expenses: You have to plan your financing carefully to maximize interest deductions within the allowed limits. However, it is important to know how interest limitation rules may affect your debt financing.
Review entertainment expenses: You must confirm that the entertainment costs are correctly categorized and claimed within the 50% limit. You need to keep detailed records of all business-related entertainment activities.
Capital vs. revenue expenses: You have to make clear distinctions between capital and revenue expenses to ensure they are treated correctly.
Utilize loss carry-forward: You can use strategies to take advantage of tax losses in future periods, keeping in mind the 75% limitation when forecasting future taxes.
Consider group relief: You can look for ways to distribute losses across qualifying group companies. To qualify, you must confirm that your group operations are structured properly.
Stay updated: You have to keep informed about any changes in tax laws that may affect your eligibility for deductions. For that purpose, you should regularly check tax updates from the Ministry of Finance.
Optimize depreciation: You need to develop a fixed asset management policy that aligns with tax regulations and accounting standards. Also, consider how different depreciation methods will impact your taxes.
Manage charitable donations: You should create a policy for corporate donations to qualifying entities, ensuring that charitable contributions are eligible for tax deductions.
Regular tax checks: You have to conduct regular reviews of your tax status and deduction claims to ensure compliance and identify areas where you can improve.
Utilize technology: You have to use tax management software to automate expense tracking and reporting, which will help you identify deductible expenses more efficiently.
Train key staff: You need to make sure your finance team and other relevant employees understand tax deduction principles and are updated on any changes in tax laws.
Time your expenses: You should adjust the timing of certain expenses to maximize their tax benefits. This can involve making certain payments sooner or delaying them based on your company’s tax situation.
Review transfer pricing: If you are part of a multinational company, ensure that intercompany transactions comply with UAE tax laws to qualify for deductions.
Research industry-specific deductions: You should research any specific tax benefits or incentives available in your industry, as some sectors offer additional deductions.
How Can We Help You?
By claiming the right deductions, you can increase your company’s profits and improve your tax position while staying compliant with the UAE Corporate Tax Law. However, it is important to ensure that your deductions meet all legal requirements to avoid penalties or rejected claims.
At Now Consultant, our experienced team of tax advisors guides you through complex tax rules, helping you identify areas for optimization and minimizing risks. We ensure that your business’s tax strategy aligns with legal requirements and business goals. We help you maximize your corporate tax deductions while remaining fully compliant with UAE regulations.