A Guide to Non-Deductible Expenses Under UAE Corporate Tax

The calculation of taxable income under the UAE corporate tax will be as per the accounting rules. However, the regime of the proposed corporate tax in the UAE will restrict the deduction of certain expenses. Corporate tax consultants in Dubai advise business owners to consider the interest capping rules and non-deductible expenses while initiating tax planning. Non-deductible expenses and interest capping rules have been introduced to ensure that relief can only be obtained for expenses incurred for the purpose of generating taxable income.

It will also help the government to address possible situations of abuse or excessive deductions. However, corporate tax advisors in Dubai recommend that businesses wait for the UAE Corporate Tax Law, which is pending to be issued. Meanwhile, we can discuss the key aspects of non-deductible expenses and interest capping rules based on the UAE corporate tax Public Consultation Document. Keep reading to know further:

UAE Corporate Tax Interest Capping Rules

The proposed UAE corporate tax regime will cap the amount of net interest expense, which can be deducted to 30% of a company’s Earnings before Interest, Tax, Depreciation, and Amortisation (EBITDA), as adjusted for the corporate tax. This capping is aligned with the interest capping rules in the Action 4 of the OECD’s Base Erosion and Profit Shifting project. Businesses will be, however, allowed to deduct up to a certain amount of net interest expenditure (safe harbour or de minimise amount) irrespective of the interest deductibility limit based on the EBITDA rule. Corporate tax consultants in Dubai can guide businesses further.

Exceptions for Interest Capping Rules

The UAE corporate tax regime recognises that each industry will have different capital needs and risk profiles. Corporate tax advisors in Dubai can advise business owners on the exceptions to interest capping rules. In line with this exception, the interest capping rules will not apply to the following type of businesses:

  • Banks
  • Insurance businesses
  • Regulated financial services entities
  • Businesses carried on by natural persons

Interest Capping Rules for Consolidated Groups

Businesses that are a part of a consolidated group are allowed to apply a different interest capping threshold by reference to the group’s overall position. The UAE corporate tax regime requires the interest paid on related party borrowings to be at arm’s length when such borrowings are used for certain specific intra-group transactions such as to pay a dividend or capitalise a group company. However, related party interest will be deductible only when there is a valid commercial reason for availing of the loan. The valid commercial reason will be deemed to exist if the related party lender is subject to the corporate tax (or any equivalent tax) of at least 9% on the interest income earned. Businesses can consult with corporate tax consultants in Dubai to know further about interest capping rules for consolidated groups.

Non-Deductible Expenses under Corporate Tax

The UAE corporate tax regime has categorised certain forms of expenses as non-deductible. Corporate tax advisors in Dubai can advise businesses on non-deductible expenses. Consider the following to get a clear understanding of the non-deductible expenses under the UAE corporate tax regime:

  • The related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income will not be deductible for CT purposes. However, the related party will be allowed to claim a deduction if the payment is attributed to a mainland branch of the Free Zone Person.
  • Businesses will be allowed to deduct up to 50% of the expenditure incurred to entertain customers, shareholders, suppliers and other business partners, to acknowledge that these types of expenses often also have non-business or personal elements.
  • No deduction will be allowed for certain specific other expenses such as administrative penalties, recoverable VAT, and donations paid to an organisation that is not an approved charity or public benefit organisation.

Consult with the Best Corporate Tax Consultants in Dubai, UAE

Corporate tax agents in Dubai such as Jitendra Chartered Accountants (JCA) can advise business owners to carefully navigate key corporate tax provisions such as interest capping rules and non-deductible expenses. The purpose of these provisions is to ensure that no taxable person takes undue advantage of the UAE corporate tax regime or makes excessive deductions. JCA has a team of corporate tax advisors in Dubai who can help the businesses to comply with such complex provisions in the corporate tax regime.

Our services at JCA as Corporate Tax Consultants include CT Assessment & Advisory Services (one-time or retainer basis), CT Compliance Services & CT Agent Services to Represent to Federal Tax Authority (FTA) of UAE in case of any notices served by FTA. Ensure corporate tax compliance and avoid relevant penalties by availing of JCA’s corporate tax services in Dubai, UAE. JCA offers customised tax solutions to allow businesses to comply with the UAE corporate tax hassle-free.