Corporate tax starts from the net profit in your financial statements, then adjusts it. Some costs come straight out, some are limited, and a few are never allowed. Getting these adjustments wrong is the most common reason a return has to be corrected later.
The general rule
Expenses are deductible when they are incurred wholly and exclusively for the business and are not capital in nature. Costs with a private element, a common issue in owner-managed companies, need to be split so that only the business portion is claimed.
Costs that are limited
- Entertainment of customers, suppliers and other business contacts: only 50% is deductible
- Net interest expense: broadly capped at 30% of earnings before interest, tax, depreciation and amortisation, with a safe harbour for smaller amounts of net interest
- Payments to related parties: deductible only up to an arm’s length amount, supported by transfer pricing evidence
Costs that are never deductible
- Fines and penalties, including FTA penalties
- Bribes and other illegitimate payments
- Dividends and profit distributions to owners
- Corporate tax itself, and recoverable input VAT
- Donations to bodies that are not approved public benefit entities
Owner's salary and drawings
In a company, a genuine salary for work actually performed is deductible if it is at market rate and properly documented in payroll. Money simply taken out of the business is a distribution, not a salary, and is not deductible. This is worth fixing before the year end rather than arguing about it afterwards.
Depreciation, not the asset
Buying equipment is capital expenditure. You do not deduct the purchase price in one year; you deduct depreciation over the asset’s life, following your accounting policy. Businesses that treat large purchases as an expense often report a loss that the FTA will not accept.
Keep the evidence
A deduction is only as good as the record behind it. Invoices in the company’s name, contracts, payroll records and board approvals for related party arrangements are what turn a claimed expense into a defensible one.
Questions we are asked about this
Is staff entertainment treated the same as client entertainment?
No. The 50% restriction targets entertainment of people outside the business. Genuine staff costs are generally deductible in full, subject to the usual rules.
Can I deduct expenses paid before I registered for corporate tax?
Expenses relating to your tax period are considered under the normal rules. The date you registered does not change which costs belong to the period.
What about my car?
If it is used partly privately, only the business portion is deductible, and you need a reasonable basis for the split. The VAT treatment of motor vehicles is stricter still.
Need help with this? VATAXSYS, VAT and Tax Consultant, handles corporate tax filing for businesses across the UAE. Call +971 55 240 3135 or message us on WhatsApp for a free consultation.