Why are Illegal Activity Expenses Not Deductible for Corporate Taxes?

Running a business is no easy task. There are countless rules and regulations that shape how companies operate and how they handle their finances. It means keeping track of various expenses—from rent and salaries to operations and advertising. But what if some of those expenses are tied to illegal activities? Can you write them off?

The short answer is No.

Why? Because the law doesn't reward bad behaviour.

The UAE tax system is established with an aim to support fair business practices. It allows deductions under the corporate tax for legitimate expenses because they’re part of doing business—things like rent, salaries, equipment, or inventory. When a company is involved in something unlawful—say, selling banned products or evading regulations—those expenses can’t be claimed as deductions while filing corporate taxes or it would be like giving them a discount for breaking the law.

So, let’s break down why tax authorities don’t let businesses deduct illegal expenses—and what happens if they try. 

First, Let's Understand What an Illegal Activity Actually Means

Any practice that directly or indirectly goes against the law can be deemed illegal.

• Bribes or kickbacks to government officials
• Fines and penalties paid to regulatory bodies
• Costs related to smuggling or selling banned goods
• Running a business without proper licenses
• Drug money or fraud (yes, even if it's “profitable”)

Since the introduction of corporate tax in the UAE in 2023, the Federal Tax Authority (FTA) has set clear rules about what can and cannot be claimed. Articles of the UAE Corporate Tax Law make it clear that any expenditure incurred for an illegal activity is not deductible. So, even if the income from such activity is taxed, the related costs can’t be used to reduce your tax burden.

This aligns with international practices and helps the UAE maintain its position as a transparent, business-friendly country—without turning a blind eye to unethical practices.

What Happens If a Business Tries to Deduct Illegal Expenses?

Let’s say a business is involved in something shady and spends money to make it happen—maybe it paid someone under the table to win a contract or forged documents for a quicker import process. Even if that money is recorded as an expense in the company’s accounts, it won’t reduce its taxable income. This is because FTA have ways to catch such shady deductions -

- Audits – During audits, if your expenses look suspicious, the FTA will surely look further into it.

- Whistleblowers – Disgruntled employees or competitors might also report illegal deductions.

- Bank Records – Large unexplained cash withdrawals are sometimes enough to trigger investigations.

If caught, the consequences include:

- Back taxes + interest – Businesses will owe what they tried to deduct, plus penalties.

- Fines or criminal charges – Such tax fraud can also lead to lawsuits or jail time.

- Reputation Damage – This can hurt your chances of securing future investments or partnerships.

Moreover, allowing illegal expenses to creep into your accounting weakens your internal controls. It also increases the chances of more serious fraud within your team. 

What Businesses in the UAE Should Focus on?

The primary focus of any business should be on clean books and clear accountability. Because the cost of playing it straight is far lower than the cost of trying to hide illegal expenses.

Businesses must -

• Make sure their finance and legal teams are aligned on what qualifies as a legitimate expense
• Avoid cash-heavy transactions that can’t be traced
• Set up internal systems to flag suspicious payments
• Train their staff on ethics and anti-bribery laws

Looking Ahead

With corporate tax being a new reality for UAE businesses, compliance is not something to take lightly. The FTA has already issued detailed guidelines on allowable and non-allowable expenses. And as tax audits become more common, even small slip-ups could turn into major problems. Here, the best approach is to build a tax strategy that doesn’t leave any room for grey areas.

Thus, if your company is spending money, make sure it’s spent the right way. That’s the safest way to grow, scale, and sleep well at night.

Get CDA’s Corporate Tax Assistance

CDA’s professional tax experts are equipped with knowledge of all the prevailing tax regulations and also have the best expertise in providing the assistance to the client in differentiating the expenses and detecting the illegal expenses beforehand. The CT experts will enable the business entities to identify the deductible expenses and calculate the taxable income accurately without any complexities. The CDA’s professionals are always ready to provide the personalized corporate tax assistance to the clients as per the requisites.

To know more about the CT services, connect to our team today for Free one hour consultation!

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.