Corporate Tax Series:
What is an Allowable Expense?

Common Allowable Expenses
(when incurred wholly and exclusively for business):

Operating Costs
Rent: Office or warehouse rent, and expenses related to maintaining business premises.

Utilities: Electricity, water, internet, and phone services for business operations.

Office Supplies: Stationery, printing materials, and other consumables.

Maintenance and Repairs: Costs to keep business assets in good working order.

Salaries and Wages:
Compensation paid to employees, including bonuses, benefits (like medical insurance). The salary must be reasonable and align with market conditions and the company’s financial position.

Professional Fees: Fees paid to external professionals such as accountants, auditors, lawyers, and consultants for services related to the business.

Marketing and Advertising Expenses: Costs for promoting products or services, including digital marketing, print ads, and promotional events aimed at generating income.

Travel Expenses: Costs related to business travel, including flights, accommodation, and meals, when incurred for business purposes.

Depreciation and Amortization: The gradual reduction in the value of fixed assets (depreciation for tangible assets like machinery, vehicles) and intangible assets (amortization for assets like patents, trademarks) used in the business. This is generally deductible over the asset’s useful life.

Interest on Business Loans: Interest payments on loans or finance obtained for legitimate business purposes are generally deductible.

• Interest Deduction Limitation: There are specific rules regarding interest deductibility. Generally, net interest expense (interest expense less interest income) up to 30% of tax-adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is deductible. However, this rule doesn’t apply if the net interest expense is below a certain threshold (currently AED 12 million). Special rules apply to interest on loans from related parties for certain transactions (e.g., related to dividends, share capital reduction, or acquisition of related parties).

Research and Development (R&D) Costs: Expenses related to innovation or the development of new products/services that improve business performance.

Bad Debts: Unrecoverable debts may be deductible if they meet specific criteria and are properly written off.

Insurance Premiums: Premiums for business-related insurance coverage (e.g., property, liability, professional indemnity).

Key Rules and Specific Considerations for Deductibility in UAE:

“Wholly and Exclusively” Rule: This is the fundamental principle. If an expense serves both business and personal purposes, only the identifiable business portion is deductible. If an exact split isn’t possible, a fair and reasonable proportion can be claimed.

Capital vs. Revenue Expenditure:

• Revenue expenditure (day-to-day operating costs like salaries, rent) is generally immediately deductible.
• Capital expenditure (large investments in assets for long-term benefit, e.g., purchasing a building or significant machinery) is not immediately deductible in full. Instead, their cost is recovered over time through depreciation or capital allowances.

Entertainment Expenses: This is a notable specific rule in the UAE. Businesses can only deduct up to 50% of entertainment expenses incurred for business purposes (e.g., meals with clients, client entertainment).

Charitable Contributions: Donations are only deductible if made to qualifying public benefit entities as specified by the UAE tax authorities. Donations to non-qualifying entities are not deductible.

Documentation: Maintaining accurate and detailed records, invoices, and receipts is crucial to substantiate all claimed expenses.

Timing of Expenses: Expenses are generally deductible in the tax period in which they are incurred.

Expenses that are generally NOT allowable (or have strict limitations) in the UAE:

Personal Expenses: Any costs incurred for the personal benefit of the owner, shareholders, or employees (e.g., personal travel, family expenses, personal withdrawals).

Fines and Penalties: Costs arising from legal infractions, regulatory breaches, or non-compliance (e.g., traffic fines, late filing penalties). However, costs paid as compensation for damages or contract breaches might be an exception.

Bribes and Illegal Payments: Universally disallowed.

Dividends or Profit Distributions: Payments to shareholders are distributions of profit, not business expenses, and are therefore not deductible for corporate tax.

Corporate Tax Itself: The corporate tax paid by the company is not an allowable expense.

Recoverable VAT: If a business can reclaim input VAT (Value Added Tax) on an expense, the VAT portion of that expense is not deductible for corporate tax purposes.

Taxes Imposed Outside the UAE: Generally not deductible, though foreign tax relief in the form of tax credits may be available in some cases to avoid double taxation.

Losses Not Connected to Business: Losses from personal investments or activities outside the core business operations are not deductible.

Excess Pension Contributions: Employers’ contributions to private pension funds in excess of 15% of an employee’s total remuneration, or those not paid within the relevant tax period, may not be deductible.

It is highly recommended to consult with a qualified tax advisor in the UAE to ensure full compliance and optimize your company’s tax position under the specific provisions of the UAE Corporate Tax Law.