United Arab Emirates
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.
Depreciation and amortisation
The CT Law is silent on the tax treatment of depreciation / amortisation.
The UAE CT Law provides that net interest expense (NIE) up to 30% of tax adjusted earnings before interest taxes depreciation and amortisation (EBITDA) will be deductible. However, this should not apply if the NIE for the relevant tax period does not exceed the threshold of AED 12 million. If this threshold is exceeded, the taxable person may deduct the higher of the threshold or 30% of EBITDA.
The following would be considered as interest for the purpose of the general interest limitation rule:
- Amounts incurred in connection with raising finance (including guarantee fees, arrangement fees, commitment fees, and any other fees similar in nature).
- Interest on Islamic Financial Instruments that is compliant with the Sharia principles or any equivalent instruments or the combination of both,
- Interest component on forward contracts, futures contracts, options, interest rate and foreign exchange swap agreements, or any other financial derivative instruments.
- The finance element of finance and non-finance lease payments.
- Foreign exchange gains.
EBITDA is mainly the taxable income adjusted for the following items:
- NIE for the relevant tax period (excluding any in relation to qualifying infrastructure projects).
- Depreciation and amortisation expenditure taken into account in determining the taxable income for the relevant tax period.
- Any interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022.
If the EBITDA arrived at after the above calculation is negative, the amount of EBITDA to be considered for determining the 30% limit will be AED 0.
The NIE attributed to debt instruments, the terms of which are agreed prior to 9 December 2022, are exempt from the application of the general interest limitation rule. NIE incurred by a qualifying infrastructure project person will not be subject to the general interest limitation rule.
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 party:
- 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.
Donations paid to entities that are non-qualifying public benefit entities will not be considered as deductible for UAE CT purposes.
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.
Bribes, kickbacks, and illegal payments
Bribes or other illicit payments will not be considered as deductible for UAE CT purposes.
Fine and penalties
Fines and penalties (other than compensation for damages for breach of the contract) will not be considered as deductible for UAE CT purposes.
CT, recoverable VAT, and taxes imposed outside the United Arab Emirates will not be considered as deductible for UAE CT purposes.
Other non-deductible expenses
Dividends / profit distribution and other expenses specified in Cabinet decision will not be considered as deductible for UAE CT purposes.
Net operating 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 an exempt person or QFZP.
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%.