United Arab Emirates

Deductions

Deductible Expenditure

Expenditure that is not of a capital nature and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business should generally be tax deductible. The UAE CT Law disallows / restricts the deduction of certain expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating Taxable Income, and to address possible situations of abuse or excessive deductions.

Where expenditure is incurred for more than one purpose, a deduction will be allowed for any identifiable part or proportion of the expenses incurred wholly and exclusively for deriving Taxable Income. Also, an appropriate proportion of any unidentifiable part or proportion of the expenses incurred for the purposes of deriving Taxable Income that has been determined on a fair and reasonable basis can be claimed for deduction for UAE CT purposes.

The CT Law is silent on the tax treatment of depreciation / amortisation.

Entertainment Expenditure

Expenses associated with entertainment of customers, shareholders, suppliers and other business partners such as meals, accommodation, transportation, admission fees, facilities and equipment used for entertainment and other expenses specified by a Cabinet decision can be deducted up to 50% of the amount incurred. 

Interest Expenditure

The UAE CT Law provides that net interest expense up to 30% of tax adjusted EBITDA will be deductible. This will be subject to a safe harbour / de-minimis threshold that will be specified by a Cabinet decision. 

Interest capping rules will not apply to banks, insurance businesses and certain other regulated financial service entities. Also, interest capping rules will not apply to Business carried on by natural persons / individuals or any other Person that may be determined by a Cabinet decision

The net interest expense amount disallowed for deduction under the interest capping rules could be carried forward and deducted in the subsequent ten tax periods.

In addition to the general interest limitation rule set out above, no interest deduction will be allowed if the loan was obtained, directly or indirectly, from a related party for the following transaction with the related parties:

• dividends / profit distribution;
• redemption, repurchase, reduction or return of share capital;
• capital contribution; or
• acquisition of ownership interest in a legal entity, who is or becomes a related party following acquisition.

Other non deductible expenditure

Fines and penalties (other than compensation for damages for breach of the contract), bribes or other illicit payments, donations paid to entities that are non Qualifying Public Benefit Entities, dividends / profit distribution, CT, recoverable VAT, taxes imposed outside the UAE and other expenses specified in Cabinet decision will not be considered as deductible for UAE CT purposes.

Unrealised gains or losses

Based on the CT Law and the FAQs, a Taxable Person can opt for the following:

• Elect to recognise gains and losses on a ‘realisation basis’ for the CT Law purposes – that is, any and all unrealised gains would not be taxable (and conversely, any and all unrealised losses would not be deductible) until they are realised; or
• Elect to recognise gains and losses on a ‘realisation basis’ for the CT Law purposes for assets and liabilities held on capital account only – that is, only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised. Unrealised gains and losses arising from assets and liabilities held on revenue account, on the other hand, would continue to be included in taxable income on a current basis.

Held on capital account refers to assets that are not traded, assets that are eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.

It is pertinent to note that impairment loss related to investments that satisfy the participation exemption conditions will not be considered for tax purposes.

Tax losses

The CT Law provides that a Business can offset tax losses against the Taxable Income of subsequent tax periods when computing the Taxable Income for that period. The set-off during any tax period cannot exceed 75% of the Taxable Income for the tax period (except in circumstances that may be prescribed in a Cabinet Decision). Any tax loss remainder can be carried forward to a further subsequent tax period indefinitely.

A Taxable Person cannot claim tax loss relief for losses incurred before the date of commencement of the UAE CT regime, losses incurred before it became a Taxable Person under the CT Law and losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under the CT Law.

UAE CT allows transfer of tax losses between group entities where there is 75% or more common ownership and where other certain conditions are met such as having the same financial year and using the same accounting standards and not being Exempt Person or Qualifying Free Zone Person. 

In order to curb transfer of tax losses through transfer of ownership in case of Taxable Persons that are not listed on a Recognised Stock Exchange, the CT Law provides that the tax losses can only be carried forward and utilised by a Taxable Person on satisfaction of the following conditions:

• The same Person or Persons continuously owned at least a 50% ownership interest in the Taxable Person from the beginning of the tax period in which the tax loss is incurred to the end of the tax period in which the tax loss or part thereof is offset against Taxable Income of that period;
• The Taxable Person continued to conduct the same or a similar Business following a change in ownership of more than 50%.