Introduction

 

Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), certain
expenses are disallowed when calculating the taxable income of a business. Here
are some of the key disallowed expenses under the UAE corporate tax regime:

1. Business-related:

expenses are fully allowed as deductible expenses under
UAE corporate Tax law.

2. Bribes, Fines, and Penalties:

Any payments made for bribes or illegal
activities, including fines and penalties (except for contractual breaches), are
not deductible.

3. Donations and Grants:

Donations and grants are typically not deductible
unless given to a qualified charity or a public benefit organization recognized
by the UAE government.

4. Expenses Related to Exempt Income:

Expenses incurred in earning exempt
income, such as dividends from certain qualified shareholdings, are not
deductible.

5. Personal Expenses:

Personal expenses that are not incurred wholly and
exclusively for the purposes of the business are disallowed.

6. Entertainment Expenses:

Entertainment expenses such as hospitality, amusement, and recreation costs are generally not deductible, except where 50% of the expenses are allowed to be directly related to the business.

7. Interest Capping:

Net Interest expenditures do not exceed AED 12.00 million
in any given tax period. If they exceed, they may be disallowed or limited,
particularly in relation to thin capitalization rules or restrictions on interest
deductibility.

8. Non-Commercial or Non-Business Expenses:

Any expenses not incurred for commercial or business purposes or not necessary for the production of taxable income are not deductible.

9. Capital Expenditures:

While depreciation or amortization of capital assets may be deductible, the initial capital expenditure is not. However, these may be capitalized and deducted over time through depreciation or amortization.

10. Income Tax Payments:

Any tax paid on the income, such as corporate tax, is
not deductible.

11. Dividends:

Payments made as dividends to shareholders are not deductible,
as they are distributions of profit rather than business expenses.

Conclusion

These disallowed expenses align with international best practices to prevent base
erosion and profit shifting (BEPS) and to ensure that only genuine business-related expenses are deducted for tax purposes.