What Are The Expenses That Can Be Deducted While Calculating The Corporate Tax In Special Circumstances?

The UAE Government announced on January 31, 2022, that the UAE would be enacting legislation to levy federal Corporate Tax (C T) on company profits, which would be effective for the tax period beginning on or after June 1, 2023. 

As part of the C T implementation procedure, the UAE Government first issued a Public Consultation Document on April 28, 2022, and then promulgated the Corporate Tax legislation via Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on December 9, 2022. 

You can also read: Corporate tax in UAE - All you need to know about it in advance

Expenses that can be deducted while calculating the corporate tax

In general, all legitimate business expenses paid solely for the purpose of generating Taxable Income are deductible, though the timing of the deduction varies depending on the type of expense and the accounting method used. For capital assets, spending is typically recognized through depreciation or amortization deductions over the asset's or benefit's economic life.

Expenses with a dual purpose, such as those incurred for both personal and business reasons, must be apportioned, with the relevant part of the expenditure treated as deductible if incurred wholly and exclusively for the taxable person's company.

In corporate tax, certain expenses that fall under general accounting rules may not be subjected to the tax deduction. These are added back to accounting income for determining taxable income. A few of them are as follows:

• Depreciation or amortization expenses for Capital Assets.
• Business setup, license renewal, and other government fees and charges that are paid entirely or primarily in the course of business.
• A value-added tax that is not recoverable under VAT legislation.
• 50% of the client's leisure costs.
• Interest costs on debt funding up to 30%.
• Loans to related parties are deductible only if they serve a legitimate business purpose.
• Payments made to a mainland branch of the Free Zone entity, may be deductible.

Interest expenditure

The Corporate Tax in UAE limits net interest cost deduction to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). Businesses may, however, deduct up to a certain sum of net interest expenditure as determined by the Cabinet. Furthermore, this limit will not extend to businesses run by individuals or certain types of businesses, such as banks or insurance.

You can also read: How Corporate Tax Will Affect your Business in the UAE?

Interest Capping Rules

The UAE Corporate Tax considers interest and other financing expenses to be business costs. The UAE Corporate Tax, on the other hand, must restrict net interest expense to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). For instance, if interest payments total 100 AED, only 30 AED may be deducted as interest.

Loans to related parties are deductible only if they serve a legitimate business purpose. The lender of such debt must pay at least 9% corporate tax. Payments made to a mainland branch of the Free Zone entity may also be deductible.

Liberation from Capital Gains and Dividend Taxes

• Dividends and capital gains from the sale of subsidiary shares are usually exempt from corporate tax in UAE.
• Corporate Tax in UAE will not apply to any dividends received by UAE companies. This includes dividends paid by Free Zone Persons, who benefit from the UAE's 0% company tax rate.
• There will also be an exemption from Corporate Tax for dividends received by foreign companies and capital gains from the sale of shares in both UAE and foreign companies if certain criteria are met:
• The UAE shareholder firm must own at least 5% of the subsidiary company's shares.
• To qualify for the participation exemption, foreign businesses must have a Corporate Tax rate of at least 9%.

Special Exemptions

Non-residents who run, lease, or own foreign transportation aircraft or ships are exempt from UAE CT. As long as the UAE business in that foreign jurisdiction gets the same tax treatment, this is acceptable.

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