Corporate Tax - Deductible and Non-Deductible Expenses
The UAE Corporate Tax, introduced under Federal Decree-Law No. 47 of 2022 and effective for financial years starting on or after 1 June 2023, applies to businesses across the country in line with international tax standards. The standard rate is 9% on taxable income above AED 375,000, while income up to this threshold is taxed at 0% to support small businesses. Large multinational groups with consolidated global revenue above EUR 750 million may be subject to a 15% rate under OECD Pillar Two rules.
The following steps provide a brief overview of how taxable income is determined and how the corresponding Corporate Tax is calculated.
1. Corporate Tax Computation
Step 1: Start with Accounting Profit (Net Profit/Loss) as per IFRS / IFRS for SMEs.
Step 2: Adjust for tax-specific rules (add back non-deductible expenses, deduct exempt income, apply reliefs).
Step 3: Arrive at Taxable Income.
Step 4: Apply the UAE Corporate Tax Rates:
0% on taxable income up to AED 375,000.
9% on taxable income above AED 375,000.
Different rates apply to large MNEs under Pillar Two (15%).
2. Here is a brief overview of deductible and non-deductible expenses, along with the conditions for claiming them when computing Corporate Tax. The General Rule is,
Expenses are deductible if they are:
Wholly and exclusively incurred for business purposes, and
Not capital in nature (unless depreciation or amortization is allowed).
This means only business-related expenses can be claimed, while personal or non-business costs are disallowed.
3. Allowable Expenses
Businesses may generally claim the following:
Salaries, wages, and benefits of employees.
Rent, utilities, office and administrative expenses.
Professional fees (audit, legal, tax advisory, etc.).
Depreciation and amortization of fixed assets.
Bad debts written off (if certain conditions are met).
Provisions created as per relevant Accounting Standards (IFRS/IFRS for SMEs)
Repairs and maintenance directly related to business.
Marketing, advertising, and business promotion expenses.
Interest expense (subject to thin capitalization and limitation rules).
R&D expenditure wholly related to business.
Donations to approved charities and government bodies.
4. Restricted or Partially Deductible Expenses
Some expenses are deductible only with limits:
Entertainment, amusement, hospitality (e.g., meals, events): → Only 50% of such costs are deductible.
Interest expenses: → Deductible up to 30% of EBITDA (earnings before interest, tax, depreciation, amortization).
5. Non-Allowable Expenses
These cannot be claimed:
Fines and penalties (other than compensation for damages).
Bribes or unlawful payments.
Dividends or profit distributions to shareholders.
Withdrawals by owners (drawings).
Income tax paid in the UAE or abroad.
Entertainment or gifts for personal use.
Recoverable Input Value Added Tax
6. Documentation for Expense Claims
To support deductibility, businesses must keep:
Proper invoices and contracts,
Payment proof (bank transfers, receipts),
Supporting schedules for allocations (e.g., head office charges, mixed-use expenses),
Board or management approvals (for donations, sponsorships, etc.).
7. Consequences of wrong claim of Expenses
Wrongly claimed expenses may lead to adjustment of taxable income.
The FTA can charge additional tax, penalties, and interest on underpaid amounts.
Repeated or significant errors may trigger a tax audit.
Incorrect claims can affect the company’s credibility with regulators and stakeholders.
Proper documentation and claiming only legitimate business expenses help avoid these issues.