In the dynamic business environment of the UAE, cracking the potential of corporate tax deductions is vital for firms’ success. As the UAE strengthens its status as a global economic center, an understanding of tax strategies is essential. This blog unties the essentials of corporate tax deductions in the UAE, illuminating the critical information businesses need. In light of this, we will explore the avenues that companies can navigate to optimize their tax strategies. Let’s decrypt the intricacies of the UAE’s corporate tax landscape, empowering businesses with insights to make strategic decisions.
What is a Tax Deduction for a Business?
A tax deduction (A.K.A. deductible expenditure) lowers the amount of income that is subject to taxation. For a business, it refers to an expense that it is allowed to subtract (under the tax laws) from its total income when calculating its taxable income. When a business spends money on certain things, like work-related expenses, it can subtract that amount from its total income. This reduces the income on which it has to pay taxes, potentially lowering the overall tax bill. It is a way the government encourages certain behaviors and allows businesses to keep more of their money.
Corporate Tax Deductions in the UAE
As per Clause 1 of Article 28 of the tax law, expenses incurred “wholly and exclusively” for business purposes are allowable for tax purposes. However, these expenses should not be capital in nature and should be deducted in the tax year they were incurred. Therefore, we can say that a deductible expenditure has the following features:
a) It is wholly and exclusively for business.
b) It is revenue in nature, not capital.
There are a series of tax deductions available for UAE businesses. Let’s discuss interest and entertainment expenses.
Interest Expense:
As per Article 29 of the tax law, interest expense is generally a tax-deductible expense in the tax year it is incurred. However, it should be solely for business purposes. Furthermore, the interest expense deduction is subject to other provisions of the tax law, specifically Article 28, Article 30, and Article 31.
Entertainment Expense:
As per Article 32 of the tax law, 50% of entertainment expenses (amusement or recreation) are deductible from taxable income in a tax year if they satisfy other provisions of the tax law. These entertainment expenses include expenses incurred in connection with entertaining customers, suppliers, shareholders, and other business partners. These expenses include, but are not limited to:
a) Food
d) Accommodation
c) Travelling
d) Admission Charges
e) Facilities or equipment used for the purposes of amusement, recreation, or entertainment
f) Any other expense suggested by the Minister
When is no Tax Deduction Allowed?
Clause 2 of Article 28 outlines situations in which expenses are not eligible for a tax deduction. There is no tax deduction when:
a) Expense not incurred wholly and exclusively for business
b) Expense incurred for generating exempt income.
b) Losses are not related to the taxable person’s business.
d) Any other expense mentioned in a Cabinet Decision at the suggestion of a Minister.
Non-Deductible Expenditure:
The tax law gives a comprehensive list of expenses disallowed for tax purposes. Hence, these are termed non-deductible expenditures. Article 33 does not allow tax deductions for the following expenses:
- Contributions, grants, or gifts made to an entity that is not a Qualifying Public Benefit Entity.
- Fines and penalties excluding amounts awarded for compensation in cases of damages or breach of contract.
- Illicit payments, including bribes.
- Profits, dividends, or similar benefits that are paid to an owner of the taxable person.
- Withdrawals from the business by an individual who is a taxable person under paragraph (c) of Clause 3 of Article 11 of the tax law or a partner in an unincorporated partnership.
- Corporate tax levied on a taxable person under the tax law.
- Recoverable input VAT incurred by a taxable person, as specified in Federal Decree-Law No. 8 of 2017 or its successor.
- Income tax levied on the taxable person outside the State.
- Any additional expenditures specified by a Cabinet decision upon the Minister’s recommendation.
Final Words
As the UAE cements its global economic prominence, a nuanced understanding of tax strategies becomes crucial. In light of this, this blog has unraveled the essentials of corporate tax deductions in the UAE, shedding light on the critical information businesses need. The journey through common deductions, such as interest and entertainment expenses, has illuminated the avenues available for businesses to navigate while adhering to the conditions of the tax law. Recognizing disallowed deductions, as outlined in the comprehensive Article 33, provides businesses with a clear framework for navigating non-deductible expenditures. Hence as businesses continue to thrive in the vibrant UAE economy, informed decisions around tax deductions play a pivotal role in shaping a robust financial future.
Creative Zone Tax and Accounting
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