Deductible Expense Under The UAE Federal Corporate Tax Law

The Corporate Tax law in UAE incorporates provisions regarding the deductibility of specific expenditures, delineating the extent to which they can be deducted from businesses' taxable income. As outlined in Article 28 of Federal Decree Law No. 47 of 2022, any expense incurred wholly and exclusively for business purposes is eligible for deduction.

Objectives

• Ensure expenditures are reasonable and justified, avoiding personal or extravagant purposes.
• Prevent potential abuse and fraudulent claims.

Partially Disallowed

•    Expenditure on entertainment, amusement, or recreation.
•    For Customers, shareholders, suppliers, and other business partners.
•    Net Interest Expenditure (“NIE”) allowed up to 30% of EBITDA.
•    Disallowed NIE can be carried forward and deducted over the subsequent ten tax   periods.

Disallowed Expenses

•    Exempt Income
•    Capital expenditures
•      Fines and penalties
•    Dividends/profits distributed
•    Bribes and illicit payments
•   Donations (except to Qualified Public Benefit Entity)
•     Recoverable input VAT
•     Non-business expenses (personal expenses)
•   Other specified expenses by the Cabinet Minister
•    Taxes imposed outside UAE

Disallowed Deductions under UAE Corporate Tax Law:

• Expenses not related to business.
• Expenses for earning exempt income.
• Losses unrelated to business.
• Prescribed additional expenses.

Interest Expenditure (Article 29):

• Interest expenses are capped at 30% to prevent tax avoidance through excessive debt financing.

General Interest Deduction Limitation Rule (Article 30):

• Up to 30% of earnings before EBITDA can be deducted as net interest expenditure.
• Exceptions for certain entities and thresholds set by the Minister.
• Disallowed expenditure can be carried forward for ten tax periods.

Specific Interest Deduction Limitation Rule (Article 31):

• No deduction for interest incurred on loans from related parties for certain transactions.

Key Takeaway

•   Companies should maintain comprehensive documentation to demonstrate the business relevance of their expenses.
•   Assess whether expenses are correctly categorised as business or non-business activities.
•   Ensure accurate recognition of expenses to prevent adjustments to taxable income during assessment.
•   Entertainment expenses for employees are fully deductible if provided to facilitate their duties.

How Can Reyson Badger Help?

Reyson Badger can assist firms with Deductible Expense Under the UAE Federal Corporate tax law by giving expert guidance on how to maximise deductible expenses, ensure tax compliance, and optimise tax efficiency. 

• Conduct in-depth qualitative analysis of business expenses to ensure compliance with UAE CT law.
•  Evaluate whether incurred expenses align with provisions governing deductible expenditures.
• Assess the risk of non-deduction of expenditures and its impact on corporate tax liability.
• UAE Corporate Tax Unrealized Gains

Article 20(3) addresses the taxation of unrealized gains and losses as reflected in financial statements. To grasp the tax implications, it's essential to define what constitutes unrealized gains and losses.

Unrealized Gain

An unrealized gain denotes the appreciation in the value of an asset or investment owned by an individual or entity, which has not been converted into cash. Typically, such gains arise from the increased value of stocks, gold, real estate, or other investments. These gains materialise into realised gains when the asset is sold at a profit, thereby generating cash.

For example, consider Amir's purchase of 100 stocks in ABC LLC at AED 300 per share in July 2024. In September, the value of these shares rose to AED 350 per share. At this point, Amir experienced an unrealized gain of AED 5000 ((350-300)*100) without selling the shares, as the increase in value remained on paper. However, if Amir were to sell the shares at AED 350 per share, the gains would transition into realized gains, subject to taxation.

Unrealized Loss

An unrealized loss represents a decline in the value of an asset or investment owned by an individual or entity, which has not yet translated into a cash loss. Typically, such losses stem from the decreased value of stocks, gold, real estate, or other investments. These losses materialize into realized losses when the asset is sold at a price lower than its acquisition cost, resulting in an actual cash loss.

For example, consider ABC LLC's purchase of office space for AED 50,000 in July 2024. By September, the value of this office space had decreased to AED 35,000. At this point, ABC LLC experienced an unrealized loss of AED 15,000 without selling the office space, as the decrease in value remained unrealized. However, if ABC LLC were to sell the office space for AED 35,000, the loss would become realized and would be recognized as a cash loss.

Recording of unrealized gains or losses in the financial statement

Recognition of unrealized gains or losses in financial statements is a standard practice under Generally Accepted Accounting Principles (GAAP). However, determining the tax treatment of these unrealized gains or losses is crucial.

In compliance with UAE Corporate Tax (CT) regulations, specific guidelines dictate how unrealized gains or losses documented in financial statements should factor into taxable income calculations. This determination depends on whether the gains or losses are categorized as capital or revenue.

Capital unrealized gains or losses, stemming from long-term assets or liabilities like machinery or property loans, are excluded from taxable income calculations. These items have enduring effects on a business and are therefore treated differently for tax purposes.

Unrealized gains and losses in revenue are regarded as income for tax purposes if they stem from revenue-generating activities. Revenue items, which have a short-term impact on business operations, encompass assets excluding capital and may encompass goods traded, machinery and equipment repairs, wages, and staff salaries.