Introduction – Deductions under UAE Corporate Tax Law
A Taxable Person, under the recently announced UAE Corporate Tax Law, has been provided with certain tax deductions from their Taxable Income that are incurred by the Person during the relevant Tax Period.
But what is a tax deduction? As per the UAE CT Law, it refers to an amount of expenditure that can be subtracted from the total Taxable Income of a Taxable Person, while calculating the tax liability of such a taxpayer. Tax deductions reduce the Taxable Income of a Taxable Person and which in turn, lowers the tax liability. Tax deductions are legal incentives provided as per the provisions of the law and is deductible by the Taxpayers.
Article 28 – Deductible Expenditure
Article 28 lists down the various expenditures that can be claimed as deduction by a Taxable Person to reduce their Tax Payable under the UAE Corporate Tax Law. Let’s take a look at the deductions provided under Article 28.
Expenditure incurred wholly and exclusively for the purpose of the business :
Under UAE Corporate Tax Law, deductions are provided against the expenditure that are incurred ‘wholly and exclusively’ for the purposes of the business by the Taxable Person.
Thus, all those expenditures that are legitimate in nature and incurred during the ordinary course of business to derive Taxable Income are deductible as per the UAE Corporate Tax Law.
Such expenditures are deductible in the Tax Period in which they are incurred.
Exception – Expenditure of Capital Nature not Deductible: The expenditure incurred during the course of business which is of ‘capital nature’, will not be considered as a deductible expenditure for the purposes of calculating the Taxable Income.
Expenditure that is incurred for more than one purpose, i.e., for dual purposes
There can be a situation where expenditure is utilized for more than one purpose, i.e., dual purpose. For example: an expenditure is used for business purposes and personal purposes.
Under UAE Corporate Tax Law, it provides that a deduction is allowed if the expenditure is incurred for more than one purpose for the following:–
- Any identifiable proportion or part of the expenditure that is wholly and exclusively incurred to earn Taxable Income.
- An appropriate share of any unidentified component of the expenditure incurred in order to earn Taxable Income that has been calculated on a fair and reasonable basis, taking into account the facts and circumstances, relevant to the Taxable Person’s Business.
Disallowed Deductions under Article 28 of the UAE Corporate Tax Law. :
The following expenditures cannot be claimed as deductions from the Taxable Income incurred by Taxable Person during a Taxable Period:
- Any expenditure that was not incurred in connection with the Taxable Person’s Business.
- Any expenditure incurred to earn Exempt Income.
- Losses not resulting from or linked with the Taxable Person’s Business.
- Any additional expenditure that may be prescribed in a Cabinet decision following a Minister’s suggestion.
Interest Expenditure – Article 29
Interest expenses are often used as a means of base erosion and profit shifting, i.e., BEPS, thus leading to tax avoidance. The entities claim interest deductions by excessive use of debt financing via intra-group transactions or Related Party transactions and in the process, they reduce their Taxable Income and avoid tax.
To ensure that there isn’t extreme debt financing and there are transactions of valid commercial nature, the limit for deduction of interest expenditure is provided. The UAE Government, in line with OECD’s BEPS Action Plan 4- Interest Capping Rules, has provided for capping deduction of Interest expenditure at 30%.
- Interest Expenditure to be deductible:
Interest expenditure shall be deducted in the Tax Period in which it was incurred.
However, these deductions are subject to the following provisions:
- General Interest Deduction Limitation Rule – Article 30
- Specific Interest Deduction Limitation Rule – Article 31
- Deductible Expenditure – Article 28
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General Interest Deduction Limitation Rule – Article 30
Article 30 of the UAE Corporate tax Law provides for Limitation Rules on General Interest Deduction. A Taxable Person may claim General Interest Deduction by deducting upto 30% of their earnings before EBITDA as Net Interest Expenditure. Let’s understand this better.What is Net Interest Expenditure of a Taxable Person?
A Taxable Person’s Net Interest Expenditure for a given Tax Period refers to the difference between the Interest expenditure incurred during the Tax Period and the Taxable Interest income received during the Tax Period, including the amount of any Net Interest Expenditure carried forward.
The calculation of Net Interest Expenditure shall exclude Interest expenditure that has not been allowed by any other provision of the UAE Corporate Tax Law.
Limit of claiming deductions from Net Interest Expenditure of a Taxable Person
A Taxable Person’s Net Interest Expenditure may be deducted up to 30% from their Accounting Earnings before Interest, Tax Depreciation and Amortization (EBITDA) for the applicable Tax Period, (excluding any Exempt Income, as mentioned in Article 22 of the UAE Corporate Tax Law).
Threshold set by the Minister to not be subject to General Interest Deduction Limitation Rule
Where a Taxable Person’s Net Interest Expenditure for the applicable Tax Period does not exceed a certain threshold set by the Minister, the General Interest Deduction Limitation Rule will not be applicable.
Carry Forward of Disallowed Net Interest Expenditure
The amount of Net Interest Expenditure that is disallowed during deduction may be carried forward and deducted in the ensuing ten (10) Tax Periods following the order in which the amount was incurred.
Non applicability of Interest Capping Rules
The provisions for calculating Net Interest Expenditure and claiming deductions on the same to reduce Taxable Income is not applicable on the following Taxable Persons:
- A Bank.
- An Insurance Provider
- A natural person carrying out a Business or Business activity within the State.
- Any other Person determined by the Minister.
Person associated by means of ownership or control
If a Taxable Person is associated with one or more Persons by means of ownership or control and is required to consolidate its financial statements by relevant accounting standards, the Minister may issue a decision specifying the applicability of provisions of Net Interest Expenditure deduction on such Taxable Person.
Article 31 – Specific Interest Deduction Limitation Rule
Additional and specific provisions have been provided in the UAE Corporate Tax Law with regards to deduction of Interest Expenditure that is incurred by a Taxable Person on obtaining a loan from a Related Party.
Exception in deduction in case of Related Party:
No deduction will be provided as Interest expenditure that is incurred by a Taxable Person , on any loan obtained by it from a Related Party connected directly or indirectly to such Taxable Person for any of the following transactions:
- A payout of profits or dividends to a Related Party.
- A transfer of shares to a Related Party for the purposes of redemption, repurchase, capital reduction, or return of share capital.
- Capital Contribution to a Related Party.
- Buying an ownership stake in a Person who is, or after such acquisition becomes a, a Related Party.
Note: A Taxable Person, however, may be allowed to deduct interest expenditure in the above cases, if it is able to showcase that such transactions were not undertaken to receive or gain a Corporate Tax Advantage.
In case tax is applicable on such Interest by a foreign jurisdiction, at a rate not less than 9%, then such tax liability shall not be treated as Corporate Tax advantage under this Law.
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Article 32 – Entertainment Expenditure
What is the meaning of Entertainment Expenditure?
Entertainment Expenditure includes expenses incurred while receiving and entertaining the Taxable Person’s clients, shareholders, suppliers, or other business partners which are not limited to expenses incurred on the following:
- Admission fees.
- Facilities and equipment used for entertainment, amusement, or recreation.
- Any other expenditure that may be prescribed by the Minister.
Limit of claiming Deductions for Entertainment Expenditure:
As per Article 32 of the UAE Corporate Tax Law, a Taxable Person can claim tax deduction of upto 50% (fifty percent) for any expenditure incurred on-
- Amusement, or
- Recreation during a Tax Period,
subject to Article 28 of the UAE Corporate Tax Law, related to Deductible Expenditure.
Article 33 – Non-deductible Expenditure
Non-Deductible Expenditures are certain specific expenditures for which deductions from Taxable Income of a Taxable Person are not allowed. The following expenditures incurred by the Taxable Person are barred from being claimed as deductions:
- Donations given to a corporate entity but not a Qualifying Public Benefit Entity.
- Grants given to a corporate entity but not a Qualifying Public Benefit Entity.
- Gifts given to a corporate entity but not a Qualifying Public Benefit Entity.
- Penalties and fines other than those that are paid as damages or for contract violations.
- Bribes, and illegal payments
- Payments made to the owner of the Taxable Person in the form of dividends, profit distributions, or similar advantages.
- Sums withdrawn by a natural person who is a Taxable Person as defined in Clause 3 of Article 11 of the UAE Corporate Tax Law or a partner in an Unincorporated Partnership from the business.
- Corporate Tax levied by the UAE Corporate Tax Law on a Taxable Person.
- Input Value Added Tax paid by a Taxable Person and eligible for reimbursement under the Federal Decree-Law No. (8) of 2017 mentioned in the preamble.
- Tax imposed on the income of a Taxable Person outside the UAE.
- Any other expenditure that is prescribed by the Cabinet on the Minister’s recommendation.
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