Are Entertainment Expenses Deductible Under Corporate Tax Calculation?

The businesses in the UAE have witnessed revolutionary changes after the introduction of the corporate tax in 2023. The businesses are now expected to stay compliant with the prevailing corporate tax law if they are taxable and registered under the same regime. The businesses must ensure that they pay the accurate amount of CT, and also the calculation of the taxable income and taxes must be carried out without any compromise in the accuracy and consistency. There have been many queries and questions asked by the business entities regarding the calculation of the taxable income and the allowable deductions under the CT. One common question asked is if the entertainment expense can be deducted during the calculation of the CT. The short answer to that question is “Yes.” In this blog you will be able to understand what deductible expenses are and what type of entertainment expenses can be deducted.

What is Meant by the Deductible Expenses?

Deductible expenses are the expenses that are reduced during the calculation of CT from the gross income whereby taxable income can be calculated. As per the CT regime, the expenses that are incurred as a part of normal business and that are not of a capital nature are deductible.

What Are the Eligible Deductible Expenses?

There are many expenses that might be incurred during the operations of a business, but not all expenses are eligible to be deducted during the calculation of the UAE Corporate Tax Some of the general expenses that can be deducted include the following:

• Direct costs for business operations: This cost may include the production costs, raw material costs, inventory costs, labor costs, and costs that may be incurred for the day-to-day operations of the business.
• Indirect costs: These costs may include the expenses related to the administration, depreciation costs, and other utility expenses such as rent, water, or electricity bills, etc.
• Specific expenses: If there are any other specific expenses that are considered as the deductible expenses under the CT regime, then that can be considered as deductible expenses.

How Can Entertainment Expenses Be Deducted Under the UAE Corporate Tax Law?

As per the UAE Corporate Tax regime, 50% of the entertainment expenses incurred for the external parties by the business would be deductible. The external parties would include the clients, customers, shareholders, suppliers, etc. Whereas if there are any entertainment or amusement expenses incurred for the staff, then that would be mostly 100% deductible.

What all Entertainment Expenses Can be Deducted?

The entertainment expenses that can be deducted include but are not limited to the following:

• Meal expenses incurred
• Accommodation expenses incurred, like hotel stays
• Transportation expenses incurred
• Admission fees for any concerts, events, outings, theatres, etc.
• Facilities or any other services related to the entertainment
• Any other expenses are per the CT regime and specified by ministerial decision.

Calculation of the Entertainment Expenses

Entertainment expenses incurred for clients/suppliers/shareholders:

If there are any entertainment expenses incurred on behalf of the clients or any shareholders or the suppliers, say AED 10000, then 50% of the total expenses, which would amount to AED 5000, can be set off against the taxable income, and hence only the other 50% would be taxed against the income, which would be AED 450.

Entertainment expenses incurred for staff:

If there is a gala night for the staff and the amount incurred for the event is AED 10000, then, as per the CT law, 100% of the amount can be deducted from the taxable income and hence could be saved from charging the CT of 9%.

Mixed events including staff and clients:

If there is any common event that would incur any entertainment expenses, then the deductible expense should be calculated based on the head count, and the percentage of deductible entertainment expenses should be charged based on that count. Say the event incurred an expense of AED 10000, and 60% of the attendees were staff and the rest, 40%, were the clients and shareholders. In such a case, the deductible expenses for staff would be AED 6000, and for the clients or shareholders, it would be AED 4000*50%, which would be AED 2000, and the tax charged would be AED 180.

What All Things Must be Kept in Mind While Calculating The Taxable Income?

There are many major things that are to be kept in mind in order to ensure the compliance and also to calculate the accurate taxable income and tax. The businesses must ensure proper documentation and records of each expense incurred. Businesses must also ensure that the expenses are classified based on their eligibility, and all the expenses must have the supporting documents. The corporate tax regime has many provisions and a list of the deductible and non-deductible expenses, which must be kept in mind while calculating the tax expenses. If the businesses feel that the calculation of taxes is overwhelming, then the businesses can approach the professional tax consultants.

What Are the Expenses That Must be Avoided While Claiming the Deduction of Entertainment Expenses?

Personal expenses: If there are any expenses that are incurred apart from business purposes, such as gifts, etc., to any other family member or others, then those expenses shouldn’t be included as entertainment expenses.

Non-business guests: If there are spouses of clients or other relatives, then the expenses on their behalf must be adjusted in the invoices.

Expenses without valid invoices: Any entertainment expenses that are not backed up by the invoices or receipts cannot be deducted as entertainment expenses. Also, the amount spent must not be luxurious spending, as the FTA might not allow tax deductions if it seems to be on one.

No repetitive claims: If the entertainment expenses are already deducted from the taxable income, then those expenses must not be deducted again to avoid any double dipping.

How Can CDA’ Tax Team Assist?

CDA’s tax team is well aware of all the prevailing tax laws and the tax regime in the UAE, especially regarding the recently launched CT. The businesses planning to file the corporate tax returns, calculate the CT, and ensure the compliance with the regime can take the assistance from our experts who are always on standby to provide the services. The businesses can approach the experts to get the personalized and custom-tailored tax services, which would enable them to reduce the risks of non-compliance and ensure the proper tax filing.

To know more about the tax services, connect with our team right away!

Mitesh Maithia

Tax Manager

Mitesh is a Tax Professional with expertise in direct, indirect, and international taxation, including transfer pricing, since 2018. Passionate about making complex tax matters simple, he shares insights to help businesses stay compliant and forward-looking.