Deductible vs. Non-Deductible Expenses in UAE Corporate Income Tax
- 18.07.2025
- Posted by: Uwe Hohmann
- Categories: Tax, Dubai
As we move through the peak of tax return filing season, one topic that consistently comes up among our clients is the distinction between deductible and non-deductible expenses. Under the UAE Corporate Income Tax regime, understanding which business costs can be deducted from taxable income and which cannot is essential for ensuring compliance and optimizing tax liabilities. In this article, we break down the basics to help clarify how these expenses are treated and what businesses need to consider when preparing their financial statements.
Deductible Expenses
In the UAE Corporate Income Tax framework, deductible expenses are those costs that are incurred wholly and exclusively for the purpose of the business and are not capital in nature. Here are some of the general categories of deductible expenses:
- COGS (Cost of Goods Sold): This includes all direct costs related to the production or acquisition of goods sold by the company.
- Salaries and Wages: Compensation paid to employees for services rendered during the tax period is deductible, provided these are incurred for the business.
- Depreciation: Depreciation of business assets used in generating income can be deducted, calculated using acceptable methods under UAE CIT law.
- Marketing Expenses: Costs incurred for marketing and advertising that are directly related to the business are generally deductible.
- Professional Fees: Expenses for services such as legal advice, accounting, and other professional fees directly related to business operations are deductible.
- Trade License Fees: Fees related to the legal licensing of the business for operation within the UAE are deductible.
- Interest Expenses: Interest on loans used for business purposes can be deductible, subject to limitations based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) calculations as outlined in the “Determination of Taxable Income”. The deduction for net interest expenditure is limited to the greater of 30% of adjusted EBITDA or a specified amount.
- Other Direct Operating Expenses: Other expenses directly associated with the day-to-day operations of the business are generally deductible.
Non-Deductible Expenses
Non-deductible expenditures are specific costs that cannot be deducted from taxable income when calculating Corporate Income Tax in the UAE. These expenditures are typically disallowed to ensure that taxable income is not artificially reduced through expenses that do not align with public policy goals or could be manipulated.
- Fines and Penalties: Fines and penalties levied by a statutory body or government are non-deductible from taxable income.
- Bribes or Illicit Payments: Clearly non-deductible.
- Corporate Income Tax: Any corporate income tax imposed on the entity itself is non-deductible.
- Recoverable Input VAT: Input VAT that is recoverable by the entity is not deductible as an expense.
- Foreign Income Tax: Tax on income imposed on the entity outside the UAE is non-deductible.
- Entertainment Expenses: Generally not deductible unless proven to be directly related to the business.
- Capital Expenditures: Expenditures that are capital in nature are not deductible as they are considered investments in business assets.
Apportionment of Mixed Expenses
For expenses incurred for both deductible and non-deductible purposes, an apportionment is required. Only the portion of the expense that is attributable to the generation of taxable income can be deducted. This apportionment should be made on a fair and reasonable basis, taking into account the relevant facts and circumstances of the business.
Real-Life Examples of UAE Corporate Income Tax Applications
Example 1: Deductibility of Entertainment Expenses
Scenario: A company in Dubai hosts an annual gala for its clients and business partners to strengthen business relationships. The total cost of the event is AED 100,000.
Application: As long as the entertainment expenses are incurred wholly and exclusively for the business and are reasonable and justifiable, they are deductible. The company can claim the AED 100,000 as a deductible expense when calculating its corporate income tax liability.
Example 2: Non-Deductible Personal Expenses
Scenario: The owner of a small consultancy firm in Dubai uses the company car for a family trip to Abu Dhabi, incurring expenses of AED 2,000 for fuel and maintenance related to the trip.
Application: Since the expenses are incurred for personal use, they are not deductible for corporate income tax purposes. The AED 2,000 would need to be excluded from the firm’s tax-deductible expenses.
Example 3: Real Estate Investment Income
Scenario: A natural person owns several properties that are rented out. This individual also runs a retail business under a separate trade license.
Application: The rental income from these properties is not connected to the trade license of the retail business. Therefore, this rental income is considered Real Estate Investment income and is excluded from corporate income tax.
Example 4: Mixed Use Expenses
Scenario: A company in Dubai spends AED 50,000 on software that is used both for managing the business and for personal use by the company’s owner.
Application: The expense must be apportioned between business and personal use. If it’s determined that 70% of the usage is for business purposes, then AED 35,000 (70% of AED 50,000) can be considered a deductible expense for corporate income tax purposes.
Example 5: Losses Not Connected to Business
Scenario: An IT company in Dubai invests in a startup that fails, resulting in a loss of AED 200,000.
Application: If the investment is not directly connected to the IT company’s business operations, the loss may not be deductible under the UAE Corporate Income Tax Law. The company would need to assess whether the investment was made in the ordinary course of business to determine if the loss can be deducted.
Planning for the Future
As we finalize tax return filings for our current clients, we have seen just how important it is for businesses to clearly understand the distinction between deductible and non-deductible expenses under the UAE Corporate Income Tax regime. If you are looking ahead to your next financial year filing or need support in preparing an accurate financial statement, we encourage you to get in touch early. Our team is here to guide you through the requirements with practical advice and clear direction.
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