What Are The Expenses That Can Be Deducted While Calculating Corporate Tax in Special Circumstances?
The UAE Government announced on January 31, 2022, the enactment of legislation to levy federal Corporate Tax (CT) on company profits, effective for tax periods beginning on or after June 1, 2023.
As part of the CT implementation process, the UAE Government issued a Public Consultation Document on April 28, 2022, followed by the promulgation of the Corporate Tax legislation through Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on December 9, 2022.

Deductible Expenses for Calculating Corporate Tax in the UAE
When calculating corporate tax in the UAE, legitimate business expenses incurred solely for generating taxable income are generally deductible. However, the timing of these deductions can vary based on the expense type and the accounting method used. For capital assets, expenses are typically recognized through depreciation or amortization deductions over the asset’s economic life. Expenses with both personal and business purposes must be apportioned, with only the business-related portion being deductible.
Non-Deductible Expenses in Corporate Tax
Certain expenses, while legitimate under general accounting rules, may not be eligible for tax deductions and must be added back to the accounting income to determine taxable income. These include:
1. Depreciation or Amortization Expenses for Capital Assets: These expenses must be added back to the accounting income.
2. Business Setup, License Renewal, and Government Fees: Fees and charges paid primarily in the course of business are not deductible.
3. Non-Recoverable VAT: Any value-added tax that cannot be recovered under VAT legislation is non-deductible.
4. Client Leisure Costs: Only 50% of client leisure costs are deductible.
5. Interest Costs on Debt Funding: Interest costs are deductible only up to 30%.
6. Loans to Related Parties: These are deductible only if they serve a
legitimate business purpose.
7. Payments to Mainland Branches of Free Zone Entities: These payments may be deductible under certain conditions. Understanding these deductible and non-deductible expenses is crucial for accurately calculating corporate tax in the UAE.
Deducting Interest Expenditure for Corporate Tax in the UAE
Under the UAE Corporate Tax regime, the deduction of net interest costs is capped at 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). However, businesses can deduct up to a specified amount of net interest expenditure, as determined by the Cabinet. Notably, this limitation does not apply to businesses operated by individuals or certain types of businesses, such as banks or insurance companies. Understanding these specific regulations is essential for accurate tax planning and compliance in the UAE.
Interest Capping Rules for UAE Corporate Tax
Under the UAE Corporate Tax regime, interest and other financing expenses are considered business costs. However, net interest expenses are capped at 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). For example, if total interest payments amount to 100 AED, only 30 AED can be deducted as interest.
Loans to related parties are deductible only if they serve a legitimate business purpose, with the lender required to pay at least 9% corporate tax. Additionally, payments made to a mainland branch of a Free Zone entity may also be deductible. Understanding these interest capping rules is crucial for accurate tax planning and compliance in the UAE.
Exemption from Capital Gains and Dividend Taxes
In the UAE, dividends and capital gains from the sale of subsidiary shares are typically exempt from corporate tax. This exemption means that UAE companies will not be subject to corporate tax on dividends received, including those paid by Free Zone Persons who benefit from the UAE’s 0% corporate tax rate.
Moreover, dividends received by foreign companies and capital gains from the sale of shares in both UAE and foreign companies are also exempt from corporate tax if certain criteria are met. The UAE shareholder company must own at least 5% of the subsidiary company’s shares. Additionally, to qualify for the participation exemption, foreign businesses must have a corporate tax rate of at least 9%. Understanding these exemptions can significantly enhance tax efficiency for businesses operating in the UAE.
Special Exemptions in UAE Corporate Tax
Non-residents operating, leasing, or owning foreign transportation aircraft or ships are exempt from UAE Corporate Tax (CT). This exemption applies under the condition that UAE businesses operating in the corresponding foreign jurisdiction receive similar tax treatment. Understanding these special exemptions is essential for navigating tax obligations effectively in the UAE.
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