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The UAE has started a big economic change by introducing a new corporate tax system. This change began in June 2023 and aims to diversify the economy, reduce dependence on oil revenue, and build a sustainable financial system for the long term. The new tax system applies to most businesses in the UAE and offers opportunities for tax optimization. Understanding deductible expenses is very important for businesses in the UAE to follow this new tax system. Deductible expenses are costs that can be subtracted from a company's taxable income, which lowers the amount of tax they have to pay. By managing deductible expenses wisely, businesses can reduce their tax bills and comply with the new regulations.
This simple guide will help you understand how to optimize your corporate tax strategy in the UAE. We will cover the different types of deductible expenses, the rules for claiming them, and managing expenses effectively. We will also look at specific expense categories and give advice on staying compliant with the UAE's corporate tax rules. Using this information, businesses in the UAE can confidently handle the new corporate tax system, improve their financial efficiency, and ensure long-term success.
In the UAE, expenses that are not of a capital nature and are incurred wholly and exclusively for the purpose of a taxable person’s business are generally tax deductible. However, the UAE Corporate Tax (CT) Law disallows or restricts the deduction of certain expenses to ensure that only those incurred for generating taxable income receive relief and to prevent abuse or excessive deductions.
If an expense is incurred for multiple purposes, a deduction is allowed for any identifiable portion related to generating taxable income. Additionally, a fair and reasonable proportion of any unidentifiable part can be claimed for deduction.
The general interest deduction limitation rule permits businesses to deduct up to 30% of their earnings before interest, taxes, depreciation, and amortization (EBITDA). In cases where a business's interest expenses exceed its earnings in a given tax year, the excess interest can be subtracted from the total earnings before applying the EBITDA limit. This helps in reducing the taxable income and, consequently, the tax liability. It’s important to note that this rule does not apply to exempt types of income.
As per the Federal-Decree-Law, your net interest expenditure is calculated as the difference between your earned interest and interest expenses for the tax period, including any carried forward interest from previous periods. However, if this final amount does not exceed a threshold specified by the Minister, it will not be classified as exempt. Any disallowed net interest expenditure can be carried forward and deducted within the next ten tax periods, in the order it was incurred, subject to specific conditions outlined in the decree law. Certain entities, such as insurance providers, banks, and individuals conducting business activities within the UAE, as well as others specified by the Minister, are exempt from these deduction rules.
Certain interest expenses related to loans from related parties may not be deductible under specific conditions. Here are a few key scenarios:
However, if it can be demonstrated that the loan was not taken to exploit tax deductions, or if the lender has been paying substantial corporate tax, these interest deductions may still be permitted.
Businesses can deduct 50% of their entertainment-related expenses. This includes costs such as meals, travel, accommodation, admission fees, and any equipment used for entertainment purposes.
While many expenses are deductible under Corporate Tax, certain expenditures are explicitly non-deductible. These include:
The UAE's new tax system allows businesses to subtract certain expenses from their income before calculating the tax owed. It's like reducing the portion of your income that is subject to taxation. Here are some common deductible expenses you can subtract:
Running the Business (Operating Expenses): These are everyday costs to keep your business going, like:
Traveling for Work (Business Travel Expenses): Costs for trips directly related to your business, including:
Getting the Word Out (Marketing and Advertising Expenses): Costs to promote your business and attract customers, such as:
Hiring Experts (Professional Fees): Fees paid to professionals who help your business, like:
Spreading Out Costs (Depreciation and Amortization): The gradual decrease in value of certain assets you use for your business, like:
There are some rules for claiming some of these expenses.
Knowing what expenses you can subtract from your UAE business tax bill is great, but there are a few things to keep in mind to make sure they actually count. Here are the key requirements for an expense to be considered deductible:
The expense must be something a business in your industry would normally pay for. For example, rent for an office is necessary, but a fancy vacation for your employees probably wouldn't be considered a business expense.
You need to have receipts, invoices, or other documents to prove you actually paid the expense. Think of it like showing your work in school, you need evidence to back up your claim!
The expense can't be excessive or unrelated to your business. For example, a small bakery wouldn't be able to deduct the cost of a luxury car. The expense should also be directly related to your business operations.
Make sure the expense follows all the UAE tax laws and regulations. These can change sometimes, so it's a good idea to stay updated or consult with a tax professional for the latest information.
Understanding tax deductions for your business in the UAE is important for saving money and following the rules. You can deduct expenses like rent, travel, and advertising costs from your taxes. Remember, these expenses must be necessary for your business, and you need to keep receipts and records.It's a good idea to organize your expenses carefully and keep personal and business money separate. Tax rules can change, so stay updated to take advantage of all available deductions.
Following tax regulations can be confusing and complex, but with Reyson Badger, you get helpful advice and personalized help. Our experts look at your business situation and suggest the best ways to save on taxes while following the rules in the UAE. By working with us, you can avoid penalties and save time and money. Choose Reyson Badger to get the most out of tax deductions for your UAE business and make managing taxes easier!