The UAE Government announced the introduction of a Corporate Tax Law which go into effect starting June 1st, 2023. Ever since the announcement of the UAE Corporate Tax, small and large businesses alike have been trying to measure and forecast the effect this tax is going to have on their net profits.
So, we asked the accounting and auditing experts at Am Audit how Corporate Tax is calculated in the UAE, and they gave us some insight into some of the more technical aspects of the Corporate Tax Law. Now, without any more delay, in this post we are going to be discussing how Corporate Tax is calculated and cover which business expenses are deductible and those which are not.
Deductible and Partially Deductible Expenses
Many are already familiar with the Corporate Tax rate of 9%. However, what many taxpayers may not be aware of is that the 9% Corporate Tax rate is applicable only on the net profit of a resident business which exceeds AED 375,000. So, any revenue below the threshold of AED 375,000 will be subject to 0% Corporate Tax. Similarly, Qualifying Free Zone businesses will be subject to the 9% tax rate only on income that does not meet the “Qualifying Income” definition.
Furthermore, the Ministry of Finance has suggested that any business expense which has the sole purpose of driving taxable income can be deductible in principle. Aside from expenses the business incurs to drive more taxable revenue, the Federal Corporate Tax Law allows for the following deductibles:
- Interest expenses: Up to 30% of the amount of earnings before the deduction of interest, tax, depreciation, and amortization.
- Entertainment expenses: Up to 50% of any entertainment or recreation expenditure for the purpose of entertaining and receiving clients, shareholders, or suppliers which may include costs such as meals, transportation, and accommodation.
Keep in mind, Interest expenses deduction cannot be applied to certain entities such as Banks or Insurance Providers.
Non-deductible Expenses
Now that we have covered the deductible expenses for UAE Corporate Tax purposes, the Ministry of Finance has announced that the following types of business expenditure are non-deductible:
- Tax imposed outside the UAE.
- Bribes or illicit payments
- Input Value Added Tax incurred that is recoverable.
- Interest expenses incurred on a loan obtained from a Related Party
- Amounts withdrawn from the business by a Taxable Person or an unincorporated partner.
- Fines and penalties (not including costs incurred as compensation for damages or breach of contract)
- Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit entity.
- Dividends and profit distributions
- Any expense that was not incurred for the sole purpose of operating and driving taxable revenue for the business.
- Any expense for driving revenue that is exempt from Corporate Tax
Stay Ahead with AM Audit
Filing your tax returns and getting your business’s paperwork can be time consuming. It can become increasingly stressful to have to calculate and stay up to date with the different taxes imposed in your region. Leave the paperwork to our professionals at Am Audit and focus only on what makes your business grow. Choose from Am Audit’s services including Auditing, Accounting, and Corporate Tax Services to stay ahead of the competition.
