Deduction in Corporate Tax Dubai refers to a certain amount of expenditure which can be deducted from Total Taxable Income of a Taxable person under the law. These are done during the relevant corporate tax period. The deduction reduces taxable income which in return lowers the tax liability.
Article 28 – Deductible Expenditure
The deductions are listed down in Article 28 under the Corporate Income Tax Dubai. Different types of deductions are listed below for your better understanding. Deductions are made against the expenditure which is made only for the purpose of business.
A few exceptions are also made where the Expenditure of Capital Nature is not Deductible. This means that the expenditure incurred during Capital Nature business will not be deductible.
Expenditure – Incurred for dual purposes
An expenditure which may be used for two different purposes, for example both business and personal purposes. Deductions will be made if the expenditure is incurred for the following reasons.
- Any proportion used exclusively and wholly to earn taxable income.
- An appropriate share of expenditure that is made to earn taxable income, calculated as per facts and circumstances of the taxable person.
Deductions that are disallowed under Article 28:
- Any expenditure that is termed as additional by the Cabinet Decision.
- Losses which are not resulted or linked with the business of taxable person.
- Expenditure that is incurred to earn exempt income.
- Expenditure which has no connection with the taxable person.
Interest Expenditure Deductions
Interest expenditure is basically the means used as a base erosion or profit shifting, this leads to tax avoidance. Since it is used to reduce the taxable income and avoid tax, there are certain limitations for this expenditure. There is a general interest deduction limitation rule introduced too, it lets you deduct income up to 30% before taxes, interest, depreciation and amortization (EBDITA).
Specific interest deduction limitation rule states that the amount borrowed from a part might not be deductible in the following scenarios.
- If the loan is taken from a family member for ownership of any part of business.
- In case the loan is used for reduction or sharing of return to a related party.
- If the loans are taken for paying dividends or splitting profits with a related party.
Entertainment Expenditure: This expenditure includes travel, food, stay, admission fee etc. You are allowed to deduct 50% of such entertainment expenses for businesses.
Non-Deductible Expenditure: These are the expenses which are not allowed to be deducted in any case. Such expenses are as follows.
- Profit distributions, dividends or any illegal payments such as bribes are non-deductible.
- The penalties or fines will not be deducted only in the case if they are not paid for compensation or any contract breaches.
- Gifts to Public Benefit Entity or donations will not be deducted either.
- Corporate Tax levied by the UAE corporate tax law.
- Sums that are withdrawn by a natural person.
Corporate Tax Credits and Incentives:
Foreign Tax Credit: It is the credit available for foreign taxes paid on a taxable person’s income in UAE. It cannot be carried forward or it will be lost.
Relief for Small Businesses; If the relevant income does not exceed AED 3 million during relevant tax year, in this case no tax will be applied.
Transfer within a qualifying group: Tax relief will be provided if the taxable person is of same qualifying group, it will be in case if following conditions are met.
- No taxable person falls in the category pf exempted.
- The taxable person has at least 75% commonly owned and the same financial year and same accounting standards are used.
- The taxable persons should be tax residents’ entities or if non-resident they should have PE in UAE.
Business Restricting Relief: Tax reliefs to mergers, spin-offs and other corporate restructuring transactions in the case where an independent part or whole business is being transferred, if the following conditions are met.
- It is done for valid commercial or economic reasons.
- The financial year and accounting standards are the same.
- The taxable persons should be tax residents’ entities or if non-resident they should have PE in UAE.
- The transfer is done in accordance with UAE regulations.
Free Zones (FZs): If FZ must qualify as 0% Dubai corporate tax-free zone, it should meet the following criteria.
- Financial audit statements are prepared.
- It complies with transfer pricing and other documentation requirements.
- It derives a qualifying income.
Excluded Activities: Following are the excluded activities.
- Transactions with natural person.
- Insurance activities, regulated banking, finance and leasing.
- Exploitations of immovable property or ownerships, except transactions with free-zone person related to commercial property in a free zone.
How ebs Chartered Accountants can help?
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FAQs
What are the types of deductions available under the UAE Corporate Tax Law?
The available deductions under the UAE Corporate Tax Law are expenses that are wholly and exclusively incurred for the purposes of generating income, including salaries, rent, and repairs, and provisions for bad debts, impairment losses, and donations to government-approved charitable organizations.
Are there any restrictions on the deductibility of expenses under the UAE Corporate Tax Law?
Yes, there are certain restrictions on the deductibility of expenses, including fines and penalties, donations to non-approved charitable organizations, and expenses related to non-business activities.
What factors should be considered to determine taxable income?
Tax is determined based on the company’s final financial statement which should be internationally acceptable financial standards. Apart from this, certain adjustments to be considered are passive gains or losses, tax exempt income, Income received from intra-group transfers, non-allowable tax deductions, incentives or tax reliefs, other adjustments as per the Minister.