Article 28 of the UAE Corporate Tax Law provided a detailed outline of deductible expenses that businesses can claim to reduce their taxable income. According to the law, businesses are allowed to deduct expenses incurred for the purpose of generating taxable income, provided they meet the conditions set forth. These deductions help in calculating the net taxable income and the tax liability of the business. Below are the key deductible expenses as per Article 28.
1. Expenses Incurred for the Production of Income
- General rule: Expenses that are wholly and exclusively incurred for the purpose of earning or producing income are deductible.
- These expenses must be directly related to the operations or activities generating taxable income.
2. Employee- Related Expenses
- Salaries and Wages: Compensation paid to employees for their services rendered, including wages, salaries, bonuses, and other forms of renumeration.
- Employee Benefits: Benefits such as medical insurance, retirement contributions, and other employee benefits provided by the company.
- Training Costs: Expenses for the employee training and professional development are deductible if they are related to the business.
3. Interest on Loans and Borrowings
- Interest payments made on loans, credit lines, or other forms of financing that the business uses for its operations are deductible, provided the loans are used for business purposes.
4. Depreciation and Amortization
- Depreciation: A deduction for the wea and tear of tangible fixed assets like machinery equipment, and buildings, based on their useful life.
- Amortization: Similar deductions assets, such as intellectual property, patents, trademark, or goodwill.
5. Business-related Insurance Premiums
- The cost of insurance premiums for business-related, coverage, such as property, liability, or professional indemnity insurance, is deductible.
6. Research and Development (R&D) Costs
- Costs incurred for research and development activities are deductible if they are aimed at developing new products, services or improving the existing ones.
- This includes direct expenses such as materials, equipment, and personnel related to R&D.
7. Marketing and Advertising Expenses
- Expenses include for advertising, marketing, promotions, and customer engagement, provided these activities are aimed to promoting the business and generating income.
8. Leases and Rental Payments
- Payments made for rendering property or equipment used in the business operations are deductible. This includes office rent, machinery rental, and vehicle leasing expenses.
9. Legal and Professional Fees
- Fees paid to external professionals such as lawyers, auditors, consultants, and accountants for services rendered in relation to the business operations.
10. Travel and Entertainment Expenses
- Expenses related to business travel, including flights, accommodation, meals and other necessary expenses for employees or representatives travelling for business purposes.
- Client entertainment costs may be deductible, provided they are directly related to the business.
11. Bad Debts
- If a business is unbale to collect amounts owed to it (i.e., bad debts), it may be able to deduct those debts, provided they properly written off.
12. Charitable Contributions
- Donations made to qualified charities may be deductible, subject to the applicable regulations on charitable contributions.
13. Other Necessary Business Expenses
- Other costs that are necessary for the daily operation of the business, including office supplies, utilities, and maintenance costs.
14. Provisional and Reserves
Provisions for expenses such as pension contributions, warranty liabilities, or other similar reserves may be deductible if they meet the criteria set the tax authorities.
15. Foreign Taxes Paid
- Taxes paid in other countries on income derived from foreign sources may be eligible for deduction or credit to avoid double taxation.
16. Expenses Not Deductible
- Certain expenses are specifically excluded from deductions under the UAE Corporate Tax Law such as:
- Fines and penalties.
- Non- business- related expenses
- Expenses that are deemed excessive or unjustified under the tax Law.
Conclusion
In summary, businesses in the UAE can deduct wide range of expenses that are necessary for carrying out other business operations, provided those expenses are directly related to income generation and comply with the regulations outlined in the UAE Corporate Tax Law. It’s important for business to maintain proper records and documentation to substantiate these expenses when filing tax returns.
Deductibility of Salaries and Wages under UAE Corporate Tax
Under the United Arab Emirates (UAE) Corporate Tax Law, businesses are allowed to deduct certain expenses from their taxable income, including salaries and wages. However, the treatment of salaries and wages, particularly with respect to owners, depends on the specific business structure and the nature of compensation.
Employees Salaries: Salaries and wages paid to employees are generally deductible as business expenses, including regular wages, bonuses, and employee benefits.
Owner Salaries:
- Sole Proprietorship: Owners do not receive a salary; any funds withdrawn are considered draws and not deductible
- Partnerships: Owners (partners) typically do not receive a salary; instead, they share profits which are not deductible
- LLC’s: Owners employed by the LLC can receive a salary, which deductible, provided it is reasonable for the services rendered.
Distributions to Owners (e.g., dividends) are not deductible.
Key Considerations:
- No Personal Income Tax: The UAE does not have a personal income tax on individuals
(including owners), so salaries, wages, or dividends paid to owners or employees are not subject to individual income tax. However, businesses must comply with UAE Corporate Tax Law.
- Reasonable Compensation for Owners: If an owner is employed and receives a salary, it must be reasonable based on their role and contribution to the business. The salary must align with local market conditions and the company’s financial position to be considered a valid deductible expense.
- Corporate Tax Rate: As of June 2023, the UAE introduced a federal corporate tax on business profits. Businesses with annual profits exceeding AED 375,000 are subject to a 9% tax rate.
The treatment of salaries and wages deductible expenses is consistent with the tax regulations governing corporate entities in the UAE.
Conclusions:
Under the UAE Corporate Tax Law, salaries and wages paid to employees are generally deductible, provided they are incurred for business operations. However, the treatment of salaries for owners depends on the business structure.
