All you need to know about corporate tax deductions in the United Arab Emirates

Corporate tax law has come into effect as of June 1, 2023. Businesses with corporate tax applicability must now adhere to the new rules and regulations. Here’s a comprehensive guide covering all the aspects of corporate tax deductions, the significance of ensuring compliance, common violations, penalties, and everything else you need to know about CT.

The deductions rule simply means you can claim the part of your expenses that contributed towards earning taxable income, especially when your money has been spent on various activities. If you find it difficult to pinpoint exactly how much was used for your business, you can still claim a fair part of these costs as tax deductions.

When calculating taxable income for a given period, it is important to remember that nondeductible taxes, such as expenditure that may bring you income or losses not related to your business, do not fall under the exempt category.

According to the corporate tax deduction law, you can deduct expenses directly and exclusively related to your business if those do not fall under the long-term investment category. These expenses can be claimed in the same tax period in which you incurred them, provided you follow the Decree-Law.

General interest deduction limitation rule of Corporate Tax in the UAE.

The general interest deduction limitation rule lets you deduct up to 30% of your earnings before taxes, interest, depreciation, and amortization (EBDITA). In certain scenarios when you will have to pay more interest than the amount you earned in a tax year, you can subtract that difference from your total earnings before considering EBDITA. This way, you can reduce the amount you owe in taxes. If certain types of income are already exempt, then this rule will not be applicable.

According to the Federal-Decree-Law, your net interest expenditure is ideally the difference between the interest you earned and your interest expenses for the tax period, which also includes any leftover interest from previous tax periods. However, if the final amount is not more than the amount specified by the Minister, it will not come under the exempt category.

Any disallowed net interest expenditure can be carried forward and deducted in the next 10 tax periods following the order in which it was incurred. However, this is subject to certain conditions mentioned in the decree law.

Insurance providers, banks, individuals conducting business activities within the country, and others specifically mentioned by the Minister are exempt from these deduction rules.

Specific interest deduction limitation rule.

In certain circumstances, interest borrowed from a related party may not be deductible. Here are a few scenarios:

• If the loan you borrowed is to pay dividends or split profits with a related party, interest cannot be deducted.

• If the loan is used to reduce or return share capital to a related party, the interest expenses cannot be deducted.

• If the loan is borrowed from a family member to acquire ownership of a part of any business, that interest expense does not fall under the deduction category.

With that said, if you can prove the loan was not borrowed to claim deductions, or if the person lending you the funds has been paying a good amount of corporate tax, then the deductions will still be applicable.

Entertainment expenditure

You can deduct 50% of entertainment expenses incurred for businesses. This will include, food, travel, stay, and other expenses such as admission fees or any equipment related to such entertainment.

Non-deductible expenditure

While a lot of taxes are allowed to be deducted under Corporate Tax, there is a list of taxes that cannot be deducted at all. Here are some of those:

• Donations or gifts you give to a Public Benefit Entity which do not qualify under corporate tax.

• The fines and penalties you pay cannot be deducted unless and until they are paid as compensation for damages or contract breaches.

• Dividends, profit distributions, and any illegal payments, such as bribes, cannot be exempted from tax.

The next step towards Corporate Tax

On the whole, navigating Corporate Tax Law will be smooth if businesses pay attention to crucial details and understand the laws thoroughly. The new Corporate Tax Law demands corporations inspect their income and expenditure with more accuracy and ensure legal compliance.

There are many nuances involved in the new CT law, such as the general and specific interest deductions, entertainment expenditure deductions, certain nondeductible expenditure, and the like. It is important to know which deductions are allowed, to which extent, and the maximum claiming limit to get through the tax season without uncertainties.

While it may seem overwhelming to understand and comprehend all of these laws at once, it is highly useful for your business to streamline tax strategies, and avoid unforeseen violations and penalties.