What Are The Expenses That Cannot Be Deducted While Calculating The Corporate Tax?
Taxes are one of the many mandatory expenses that a company must pay in order to keep its business running legally. However, a Corporate Tax in UAE will exempt certain types of income from taxation in order to avoid double taxation. This is to capitalize on the UAE's position as a global business hub and holding company location. While most business expenses can be deducted from a company's taxes, there are a few exceptions to this rule. These non-deductible expenses include items such as personal expenses, certain fines, and political contributions. It is important for business owners to be aware of these exceptions so that they can accurately budget for their taxes each year. Failure to pay taxes can result in stiff penalties, so it is best to err on the side of caution when it comes to deducting expenses.
You can also read: Corporate Tax Deductions in Special Circumstances
Expenditures with no deduction
- Fines and penalties (except amounts that are awarded as compensation for breach of contract or damages).
- Donations, grants, or gifts that are given to a non-qualifying public benefit entity.
- Distributions of dividends and other earnings.
- The Corporate Tax Code imposes a corporate tax.
- Expenditure that is not incurred entirely and solely for the purposes of the Taxable person's Business
- Expenditure that is incurred in generating income that is exempt from Corporate Tax
Client entertainment expenditure
A partial deduction of 50% of the cost is allowed.
Entertainment expenditures can include eating, drinking, and other hospitality such as lodging or event passes. Among the various forms of amusement are:
- 'Client business entertainment,' such as discussing a specific business endeavor or establishing or maintaining a business connection
- Client 'non-business entertainment,' such as entertaining a business acquaintance for social purposes
What to report and pay for is determined by the sort of entertainment, who arranges it, and who attends it.
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, as well as certain types of businesses such as banks or insurance.
You can also read: Impact of corporate tax in UAE
Non-Deductible Expenses while calculating the corporate tax
Many accounting principles will control the calculation of taxable income. However, in some instances, the UAE Corporate Tax regime will prohibit or limit the deduction of specific expenses. The goal is to avoid situations of abuse or excessive deductions by ensuring that only expenditures required to generate taxable income are eligible for relief.
The following expenses cannot be deducted from a taxable person's taxable income accrued during a taxable period:
- Any expense that was not paid in the course of the taxable person's business.
- Any expense incurred in order to receive exempt income
- Losses not incurred as a consequence of or related to the taxable person's business
- Any extra spending authorized by a Cabinet decision in response to a minister's recommendation
Payments made to a Free Zone entity by a related party are not deductible under Corporate Tax law. Administrative fines, recoverable VAT, and donations will not be deductible. Tax breaks of up to 50% will be available for entertainment expenditures.
How can CDA assist you in corporate tax implementation?
Charles and Darwish Associates can assist businesses with corporate tax implementation by providing expert advice and support on tax planning, compliance, and reporting. Our team of experienced tax professionals can help businesses navigate the complex tax regulations in the UAE, ensuring that they are fully compliant while minimizing their tax liabilities. We can also provide tailored solutions that help businesses optimize their tax position and achieve their financial objectives. With CDA's expertise and guidance, businesses can focus on their core operations while leaving their tax affairs in capable hands. Want to know more? Don’t hesitate to contact us right now.