Under the provisions of the UAE corporate tax law, a taxable individual can qualify for certain deductions on their income during a given tax period, subject to compliance with the stipulated requirements as outlined by the Authority.
A deduction, in this context, refers to an amount that can be subtracted from the taxable income when calculating tax liability. This deduction effectively reduces the amount of tax that the taxable individual owes to the government. It’s essential to note that these deductions are legally sanctioned and are provided for within the law. Article 28 of the UAE corporate law delineates the details of deductible expenses.
Limitations on General Interest Deductions
The limitations on general interest deductions for corporate taxation are defined in Article 30 of the UAE corporate tax law. A taxable individual can claim a general interest deduction by subtracting a maximum of 30% of their earnings before EBITDA. This deduction is calculated as the net interest expenditure.
The net interest expenditure is determined by deducting the taxable interest income received by the taxable individual from their interest expenditure during the specified tax period. This calculation should also include the amount of net interest expenditure carried forward from previous periods. It’s important to note that disallowed interest expenditure, as per the UAE corporate tax provisions, should not be included.
Maximum Deductions from Net Interest Expenditure
A taxable individual can deduct up to a maximum of 30% of their net interest expenditure from their EBITDA for the specified tax period, excluding any exempt income as stipulated In the UAE’s corporate tax legislation, as outlined in Article 22.
Threshold for Exemption from General Interest Deduction Limitation
The general interest deduction limitation rule will not apply if the taxable individual’s net interest expenditure for the specific tax period falls within the threshold set by the Minister.
Carryforward of Disallowed Net Interest Expenditure
It is possible to carry forward disallowed net interest expenditure during the deduction for up to 10 subsequent tax periods, provided that the prescribed order is adhered to.
Non-Applicability of Interest Capping Rules
The rules for claiming deductions do not apply to certain entities, including insurance providers, banks, natural persons conducting business activities within the state, and others as designated by the Minister.
Individuals Associated through Ownership or Control
Individuals falling under this category are required to consolidate all their financial statements in accordance with accounting standards. The Minister has the authority to determine whether such a taxable individual qualifies for the deduction on net interest expenditure.
Specific Interest Deduction Limitation Rule
The UAE corporate tax law contains provisions for interest expenditure deductions for taxable individuals who have received loans from related parties.
Exceptions to Deductions in the Case of Related Parties
If a taxable individual has received a loan from a related party and any of the following conditions apply, they are not eligible for deductions on interest expenditure:
1. If any profits or dividends are paid to the related party.
2. If a capital contribution to the related party is made.
3. If the taxable individual transfers their shares to the related party, with the latter planning to make a share capital return, repurchase the shares, reduce capital, or be involved in redemption.
4. If the ownership stake is purchased from an individual who will become a related party upon acquisition.
According to the corporate tax law, if a taxable individual is involved in any of the above scenarios but can demonstrate that the actions were not undertaken to gain a corporate tax advantage, they may be allowed deductions in interest expenditure. Moreover, if the situation falls under a foreign jurisdiction with a 9% tax rate, it will not be considered a corporate tax advantage as per the law.
Entertainment expenditure encompasses all expenses incurred while entertaining the taxable individual’s suppliers, clients, and others. This includes expenses such as transportation, meals, accommodation, facilities, admission fees, and any other expenses specified as entertainment expenditures by the Minister.
Limitations on Deductions for Entertainment Expenditure
During a given tax period, a taxable individual can claim a deduction of up to 50% for entertainment expenditures related to amusement, entertainment, or recreation as specified in Article 28 of the UAE corporate tax law.
Non-deductible expenditures refer to transactions for which deductions on a taxable individual’s income are not permitted according to the UAE corporate tax law. Article 33 of the UAE corporate tax law outlines the transactions considered as non-deductible expenditures. The following transactions cannot be used to claim deductions for a taxable individual:
1. Corporate taxes levied on a taxable individual as per the UAE corporate tax law.
2. Gifts given to a corporate entity that does not qualify as a Qualifying Public Benefit Entity.
3. Fines and penalties, except those imposed for contractual violations.
4. Donations made to a corporate entity not recognized as a Qualifying Public Benefit Entity.
5. Any sum withdrawn by a natural person as per Clause 3 of Article 11 in the UAE Corporate Tax Law, applicable to Unincorporated Partnerships arising from business activities.
6. Illegal payments and bribes are categorized as non-deductible expenditures.
7. Taxes levied on the income of a taxable individual outside the UAE.
8. Grants awarded to a corporate entity not meeting the Qualifying Public Benefit Entity criteria.
9. Payments to the owner of the taxable individual, such as dividends, are classified as non-deductible expenditures.
10. Input value-added tax that can be reimbursed.
11. Payments related to the owner, such as profit distributions, are non-deductible expenditures.
12. Any expenditure not falling into the aforementioned categories but recommended by the Minister.
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