Expense Guide UAE

Corporate Tax Expenses

UAE Corporate Tax Compliance – Key Considerations

1. Documentation for Business-Related Expenses

• Adequate documentation is mandatory for all business expenses.
• Expenses without proper documentation can be disallowed in taxable income computation.
• The company must maintain complete supporting documents for all business expenses.

2. Non-Business Expenses

• Expenses must meet the following criteria to be deductible:
  • Incurred wholly and exclusively for business purposes.
  • Not specifically disallowed under Corporate Tax Law.
  • Directly connected to the business activity.
  • Would not have been incurred if the business activity had not taken place.
• Expenses unrelated to the business, including related party personal expenses, are disallowed.
• Maintain separate accounts for non-deductible expenses.

3. Capital Expenses vs. Revenue Expenses

• Capital expenditures treated as revenue expenses are disallowed.
• Capital expenses are generally deductible only through depreciation or amortization.
• Establish a written capitalization policy to define thresholds and ensure compliance with IFRS and CT guidelines.

4. Personal Expenses

• Personal expenses should be routed through current accounts and should not impact P&L.
• Expenses incurred for non-business purposes are not deductible.

5. Entertainment Expenses

• Customer, supplier, shareholder, or other stakeholder entertainment: 50% deductible.
• Staff entertainment (excluding family members, private events): 100% deductible.
• Segregate expenses into separate accounts for proper deductibility tracking.

6. Transactions with Related Parties and Connected Persons

• Must be conducted at arm’s length prices.
• Maintain sufficient transfer pricing documentation and HR policy for allowances.
• Inadequate documentation for management remuneration, salaries, or benefits can result in disallowance.
• Reimbursed expenses should have clear limits and monitoring policies.

7. General Accounting Errors

• Accounting errors can lead to incorrect taxable income.
• Expenses from previous years recorded in the current tax period may be disallowed.
• Implement internal controls and review procedures to identify errors.

8. Disallowable Expenses (Article 33)

• Donations, grants, and gifts are deductible only when made to qualifying public benefit entities.
• Fines and penalties are disallowed; however, contractual compensation payments are allowed.
• Bribes and illicit payments are disallowed.
• Dividends, profit distributions, and similar benefits to owners are disallowed.
• Corporate tax, foreign taxes, and recoverable VAT are disallowed.
• Segregate disallowed expenses from allowable or restricted expenses.

9. Absence of Policies

• HR Policy: Should set standards and limits for non-contractual staff benefits.
• Capitalization Policy: Must define materiality thresholds to avoid improper expense classification.

10. Allocation of Expenses to Related Parties

• Common expenses shared with related parties must be properly allocated.
• Maintain documentation to substantiate allocation and benefit received.

11. IFRS Compliance

• UAE Corporate Tax requires compliance with IFRS or IFRS for SMEs (if revenue ≤ AED 50 million).
• Non-compliance may lead to penalties.

12. Accounting Concerns

• Unclear transaction narration: Requires voucher-level verification for tax purposes.
• Single entry for multiple vouchers: Can result in incorrect disallowances; separate accounting recommended.
• Compound entries: Should have clear narration and proper allocation.
• Wrong account posting: Correct ledger posting is essential to avoid misinterpretation.
• Misleading account names: Ensure ledger names reflect the nature of transactions.
• Input VAT written off: Non-claimable input VAT expensed off should be tracked separately.
• Assets owned by related parties: Deductibility questionable unless properly valued and documented.

13. General Anti-Abuse Rule (GAAR)

• GAAR applies to transactions primarily intended to obtain a CT advantage.
• Businesses should review arrangements to avoid adverse tax implications.

14. Useful Life of Assets

• Depreciation must follow IFRS-determined useful life.
• Tax authorities may challenge unrealistic asset life estimates; conservative estimation recommended.

15. Asset Mapping

• Maintain details of assets available for personal use:
  • Legal ownership (company, related party, connected person).
  • Actual user.
  • Purpose of use.
• Helps determine proportion of non-deductible personal use.

16. Currency Translation

• All amounts must be reported in UAE Dirhams.
• Foreign currency transactions must be converted using the applicable Central Bank exchange rate at the transaction date.

17. Documentation Retention

• Maintain records for 7 years from the end of the relevant tax period.
• Records include invoices, receipts, statements, contracts, and supporting documents.
• Digital and cloud-based storage is allowed and recommended.

18. Staff Entertainment

• Fully deductible if not related to connected person’s personal events.
• Adequate supporting documentation is mandatory.

19. Shared Supporting Documents

• Invoices issued in one group company but used by multiple companies must be properly allocated.

20. Accounting System & ERP

• Systems must support CT computations, segregated ledgers, and accurate disclosures.
• Free Zone Companies must segregate qualifying vs non-qualifying revenues.

21. Long-Standing Balances and Provisions

• Unrecoverable balances should be written off or adequately provisioned.
• Provisions cannot be deferred to manipulate taxable income; adherence to IFRS is required.

VAT Expenses

Section 10.6 Blocked Input Tax of the UAE FTA Taxable Person Guide (VATG001)

10.6 Blocked input tax

Input tax on certain expenses incurred by a person is specifically blocked from being recoverable. Such expenses are:

• entertainment expenses;
  • motor vehicles used for personal purposes; and
  • employee‑related expenses.

10.6.1 Entertainment expenses

A business is generally prohibited from recovering input tax on expenses incurred in respect of the provision of entertainment to anyone not employed by the business, including customers, potential customers, officials, shareholders, owners, and investors in the business.

The type of entertainment expenses which are covered by the restriction include hospitality (e.g. accommodation, food and drinks) which are not provided in the normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.

This means that where a business incurs any such expenses, the business will not be able to recover VAT incurred on the expenses.

10.6.2 Motor vehicles

Typically, a taxable person is able to recover VAT incurred on the purchase, lease or rental of a motor vehicle which is used for their business activities and which gives right to input tax recovery. However, where the motor vehicle is available for the personal use of any person, the taxable person will lose the right to recover the VAT incurred.

For the purpose of this rule, the ‘motor vehicle’ is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including the driver. ‘Motor vehicle’ does not include a truck, forklift, hoist or other similar vehicles.

10.6.3 Employee‑related expenses

As a consequence, determination regarding whether input tax can be recovered in respect of an employee‑related expense has to be made on a case‑by‑case basis. For example, where a business incurs compulsory medical insurance or visa costs to enable their employees to perform their duties, such costs will not be blocked under the rule. In contrast, where an employer buys a gift for the employee in appreciation for their good service, the employer would be prevented from recovering VAT on the purchase of the gift, unless it is also treated as a deemed supply.