Expenses Deduction Limitations
[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
Expenditure Disallowed
The UAE Corporate Tax regime will disallow or restrict the deduction of certain specific expenses to ensure
- that relief can only be obtained for expenses incurred for the purpose of generating taxable income, and
- Possible situations of abuse or excessive deductions are addressed
Interest Disallowance
Interest and other similar financing costs are deductible as the cost of doing business.
However, an Interest capping rule has been introduced. Accordingly, the deductible amount of net interest expense will be 30% of the business's earnings before EBITDA, as adjusted for Corporate Tax purposes
Further, Corporate Tax shall also introduce a safe harbor / de minimis amount that would allow a certain amount of net interest expenditure irrespective of the EBITDA Rule.
Also, businesses that are part of a consolidated group shall be allowed to apply a different interest capping threshold by reference to the group’s overall position.
It is clarified that interest capping rules will not apply to
- banks, insurance businesses, and certain other regulated financial services entities.
- businesses carried on by natural persons.
Conditions to be satisfied for deducting the interest paid on related party borrowing:
- It is at arm’s length – when such borrowing is used for a certain specific intra-group transaction like paying dividends or capitalizing a group company.
- The related party lender is subject to Corporate Tax (or an equivalent tax) of at least 9% on the interest income
Other Disallowances
Other disallowances include the following:
- Payment to Free Zone Person: Related party payments made to a Free Zone Person who is taxed at 0% on receipt of the income (payment to a mainland branch of the free zone person is allowed).
- Entertainment Expenses: 50% of the expenditure incurred to entertain customers, shareholders, suppliers, and other business partners.
- Penalties: Specific expenses such as administrative penalties, recoverable VAT, etc.
- Donations: Donations paid to a non-approved charity or public benefit organization.
Unrealized loss on capital items - The UAE Corporate Tax will have specific rules to determine whether an unrealized gain or loss should be considered revenue or capital item when calculating taxable
Our comments:
It becomes essential for all the businesses to review related party and connected party payments and to ensure that the same are at arm’s length to avoid disallowance by the authorities. Transfer Pricing Regulations would be required to be adhered to in such cases.
Also, expenses shall be allowed only if they are incurred to generate taxable income. For example, administration expenses incurred to earn exempt income may be disallowed by the Authorities.
