What should businesses know about corporate tax deduction in the UAE?

The introduction of corporate tax in the UAE marks a significant shift in the country’s business and financial ecosystem. As of June 1, 2023, the UAE implemented a federal corporate tax at a standard rate of 9% on taxable income exceeding AED 375,000. While this move aligns the UAE with global tax frameworks, it also imposes a new layer of responsibility on businesses, particularly in understanding what constitutes taxable income and how it can be legally reduced.

For many businesses, one of the most effective ways to manage corporate tax liability is through the use of deductions, specific expenses that can be subtracted from total revenue to arrive at a lower taxable income. However, not all business expenses are treated equally under the law.

This blog aims to demystify the topic of corporate tax deductions in the UAE, clarifying what can be claimed, what should be avoided, and how businesses can make informed decisions that comply with Federal Tax Authority (FTA) regulations.

What Qualifies as a Tax-Deductible Expense?

A tax-deductible expense reduces your business’s taxable income because it is directly related to your business operations. In simpler terms, if a cost is necessary for running the business and is not personal or capital in nature, it may qualify.

The UAE corporate tax law adopts a globally recognized principle: deductions are allowed only for costs that are “wholly and exclusively incurred” to generate business income. This means that the expense must serve a clear commercial purpose and not be mixed with personal spending or capital investment.

For an expense to be deductible:

1. It must be necessary for the business to function or grow.
2. It must be reasonable in amount and substantiated by documentation.
3. It must not fall under a category the law specifically excludes (such as fines or personal items).

Which Business Expenses Are Deductible Under UAE Corporate Tax?

Now that we understand the basic principle that only expenses wholly and exclusively for the business are deductible, the most common categories of eligible deductions are:

1. Employee Related Expenses

1. Salary and Wages: Compensation paid to employees for their services rendered, including wages, salaries, bonuses, and other forms of remuneration.
2. Employee Benefits: Benefits such as medical insurance, retirement contributions, and other employee benefits are provided by the company.
3. Training Costs: Expenses for the employee training and professional development are deductible if they are related to the business.

2. Rent, Utilities, and Operational Overheads

Basic running costs of the business, such as rent for offices or warehouses, and other business facilities, are generally deductible.

3. Marketing and Advertising Expenses related to promoting your business, such as digital advertising, event sponsorships, printed flyers, social media campaigns, or brand activation efforts, can be deducted, provided they directly serve a commercial purpose.

4. Professional Fees and Outsourced Services

External services that support your operations are deductible if directly related to the business. This includes:

1. Legal and accounting fees
2. Consultancy services
3. IT support
4. Auditing
5. Corporate tax filing or advisory services

5. 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.

6. Depreciation and Capital Allowances

The gradual reduction in value of fixed assets like machinery, vehicles, and equipment. Depreciation is often deductible over the asset’s useful life.

What Expenses Are Not Deductible?

The UAE corporate tax law explicitly disallows certain expenses, regardless of their cost or frequency.

Common non-deductible items include:

1. Fines and penalties imposed by authorities (e.g., traffic or regulatory violations)
2. Personal expenses that are unrelated to business activities and are for the personal use of the business owner or employees, including meals, travel, or entertainment for non-business purposes
3. Dividends or profit distributions to shareholders
4. Non-business donations, though, are seen as a positive aspect of social responsibility; they are not deductible for tax purposes.
5. Excessive entertainment costs, such as those related to luxury entertainment, are not deductible.

What Records Do You Need to Support Deductions?

To successfully claim a deduction, businesses must be able to prove the purpose, value, and authenticity of each expense. The FTA requires companies to retain relevant records for at least seven years.

Key documents include:

1. Invoices and payment receipts
2. Contracts or service agreements
3. Employee payroll records
4. Loan documentation (terms, interest calculations, repayments)
5. Asset registers and depreciation schedules
6. Internal records showing apportionment (e.g., separating business and personal use of assets)

Using accounting software or consulting a professional advisor like ICB can help ensure records are complete and compliant.

Common Mistakes to Avoid

Even well-managed businesses may overlook certain risks. Be cautious of the following:

1. Misclassifying capital purchases as immediate expenses
2. Claiming 100% of personal travel as business expenses
3. Failing to properly document related-party transactions
4. Not maintaining supporting records for high-value deductions
5. Using company accounts to pay for mixed or personal expenses without apportioning

How ICB Can Help Your Business Stay Compliant

At ICB, we specialize in helping businesses navigate the complexities of UAE corporate tax. Our team provides:

Expense classification and deduction review

Record-keeping guidance

Related-party transaction assessment

Audit support and FTA correspondence

Strategic tax planning to ensure both compliance and cost-efficiency

We help businesses not only follow the law, but also optimize within it.

Conclusion

Understanding corporate tax deduction in the UAE is essential for every business aiming to manage costs and remain compliant. While the tax rate may be relatively low, overlooking eligible deductions or claiming ineligible ones can have lasting consequences.

By focusing on clear documentation, legal clarity, and smart expense planning, your business can make the most of what the law allows. And when in doubt, it's wise to consult professionals like ICB who understand both the letter and spirit of the UAE tax framework.

If you’re unsure whether your business is on the right track, reach out to ICB for a practical review of your expenses and tax position before the filing deadline catches up with you.