What is Non-Deductible Expenses in Corporate Tax?
Non-deductible expenses are business expenses that cannot be subtracted from the gross income of a company when filing taxes. These expenses are usually deemed to be indirectly related or non-essential for the business by the government. Non-deductible expenses reduce the profitability of a business but do not lower its tax liability.
Different countries have different rules and regulations regarding non-deductible expenses under corporate tax. In this article, we will focus on the UAE corporate tax regime and its treatment of non-deductible expenses.
What is Corporate Tax Regime?
The UAE corporate tax regime is still in the process of being implemented and finalized. The Ministry of Finance has issued a Public Consultation Document in 2022 to seek feedback from stakeholders on the proposed features and principles of the corporate tax system. The document outlines the main aspects of the corporate tax regime, such as:-
- The scope and rate of corporate tax
- The definition and calculation of taxable income
- The rules for deductions, losses, and depreciation
- The rules for interest capping and thin capitalization
- The rules for transfer pricing and anti-avoidance
- The rules for withholding tax and double taxation relief
- The rules for compliance and administration
According to the document, the UAE corporate tax regime will apply to all businesses that are resident in the UAE or have a permanent establishment in the UAE. The proposed corporate tax rate is 10%, which is lower than the average global corporate tax rate of 23.6%. The taxable income will be calculated based on the accounting rules, subject to certain adjustments and exceptions.
One of the adjustments that will be made to the taxable income is the restriction of certain expenses that are not deductible under corporate tax. These non-deductible expenses include items such as personal expenses, certain fines, and political contributions. It is important for business owners to be aware of these exceptions so that they can accurately budget for their taxes each year.
What are the Non-Deductible Expenses Under Corporate Tax?
The Public Consultation Document gives a list of corporate tax expenses that can't be deducted. These expenses are:
- Expenses that are not entirely and solely for the business of the taxable person.
- Expenses that are capital in nature or relate to an asset that cannot be depreciated.
- Expenses that relate to exempt or non-taxable income.
- Expenses that are personal or domestic in nature.
- Expenses that are too much or too little for the business.
- Bribes, kickbacks, and illegal payments of any kind
-Penalties and fines (except amounts that are awarded as compensation for breach of contract or damages)
- Donations, grants, or gifts given to a public benefit organization that doesn't qualify.
- Payments of dividends and other earnings.
- Interest paid on borrowings from related parties that are used for certain intra-group transactions, like paying a dividend or funding a group company, unless there is a good business reason to take out the loan.
- Interest paid on borrowings that exceed the interest capping limit based on the EBITDA rule
- Losses from foreign exchange transactions or hedging instruments that have nothing to do with the business.
- Losses from selling shares or other investments.
- Costs for entertainment, recreation, hospitality, or other social activities (except those incurred for employees welfare or business promotion)
- Expenses for travel or lodging (except for those made for business reasons or when an employee moves)
- Expenses incurred for advertising or marketing (except those incurred for business promotion or brand development)
- Costs of doing research and development (except those incurred for innovation or improvement of products or services)
- Costs of getting an education or training (except those incurred for employees development or compliance with legal requirements)
The list above is not complete, and it may change once the UAE Corporate Tax Law comes out. Business owners in Dubai should talk to professional corporate tax advisors to find out what non-deductible expenses mean for their tax bills.
What are the Interest Capping Rules Under Corporate Tax?
One of the key aspects of non-deductible expenses under corporate tax is the interest capping rule. This rule limits the amount of net interest expense that can be deducted by a business to 30% of its Earnings before Interest, Tax, Depreciation, and Amortisation (EBITDA), as adjusted for corporate tax. This rule is aligned
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