Business expenses are a dynamic aspect of running a business, as they can arise from various operations and locations. Keeping track of the types of business expenses for taxes and ensuring their compliance with tax laws can be challenging. Taxes are compulsory contributions created by a government entity on individuals or corporations. For companies, non deductible business expenses are unavoidable costs that must be paid on time to sustain operations.
The types of business expenses subject to taxes may vary between countries. The same is true for the UAE which is home to the largest startup and SME ecosystem in the region. For business owners the topic of business expenses can be confusing and challenging due to its complexities. When looked into in detail, these can be understood easily and will come handy while computing your tax liabilities.
Let’s delve into the details of these expenses under UAE corporate tax. The UAE government has implemented measures to exempt certain types of income from taxation, aiming to prevent double taxation and maintain its status as a global business hub. There are exceptions to the rule of deducting many expenses from a company’s taxes.
Non-deductible expenses include certain fines, political contributions, and personal expenses. It is crucial for business owners to be aware of these exceptions to accurately budget and allocate revenues, enabling them to make informed decisions. Non-compliance with tax payments can lead to legal complications and significant penalties.
If you are a company owner or hold a decision-making position in a UAE-based company, this article provides valuable information about such business expenses. Stay informed and ensure your business remains compliant with tax regulations.
Types of business expenses for taxes with no deduction
- Non-qualifying public benefit entities cannot receive payments in the form of donations, grants, or gifts.
- Fines and penalties
- Distributions of dividends and other earnings or income generated
- Expenses which are not incurred completely or exclusively for taxable personnel’s business
- Expenses incurred in making an income that is not mentioned as an exemption from Corporate Tax
Interest Expenditure
The business owner should also be aware that the Corporate Tax in the UAE imposes a limitation on the net interest cost deduction, which is set at 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). It is important to note that businesses may be able to deduct a certain amount of net interest expenditure, subject to specific limits determined by the Cabinet.
These limits vary depending on the nature of the business. However, it is crucial to understand that this deduction limit does not apply to businesses operated by individuals or certain types of entities such as banks or insurance companies.
Client Entertainment Expenditure
Meeting clients and networking is a key part of running and scaling a business. This process also involves expenses while meeting the client or even entertaining a group of clients. Entertainment expenditure, which falls under the category of non deductible expenses, encompasses various hospitality expenses such as accommodation, event passes, meals, and beverages. It also includes amusement expenses, which can be further classified as follows:
Client Business Entertainment:
These expenses are incurred during specific business meetings or discussions aimed at establishing or maintaining a business connection. Business owners should be aware of this as in the initial stages of the business, it becomes very important to meet potential clients and generate business opportunities.
Client Non-Business Entertainment:
This refers to expenses incurred when entertaining a business acquaintance for social purposes. The deductibility of these expenses depends on factors such as the nature of the entertainment, the individuals involved, and the purpose of the event.
It is important to note that, under client entertainment expenditure, a maximum partial deduction of 50% of the total cost is allowed as per applicable regulations.
Non Deductible Expenditures While Calculating the Corporate Tax
When considering non-deductible expenditures, it is important for business owners to understand that various accounting principles come into play when calculating taxable income. The UAE corporate tax system encompasses different types of business expenses for taxes and has the authority to restrict or prohibit the deduction of certain expenses to prevent excessive deductions or abuse of the system. This ensures that deductions are granted only for expenses necessary to generate taxable income.
Specifically, the following expenses cannot be deducted from the taxable income of a taxable person during a taxable period:
- Expenses that remain unfunded or unpaid during the course of the taxable person’s business.
- Expenses incurred to generate exempt income.
- Losses that are not a direct result of the taxable person’s business or losses associated with non-business activities.
- Additional expenses authorized by a Cabinet decision with a recommendation from the minister.
deductible business expenses
Non-deductible expenses encompass various categories such as administrative fines, recoverable VAT, and donations. According to Corporate Tax law, payments made to a Free Zone entity by a related party are not eligible for deduction. It is important to note that up to 50% of tax breaks will be applicable to entertainment expenditures, providing businesses with some relief in this area.
Conclusion
This article has provided a comprehensive overview of non deductible expenses under UAE Corporate Tax. However, it is crucial to seek expert advice and support in tax planning to ensure the seamless operation of your business.
If you are a business professional or individual considering establishing a business in UAE, consider partnering with Nair & Nelliyatt Chartered Accounts as your trusted tax advisor. Our team of experienced professionals is well-versed in compliance and can guide you through the intricacies of the UAE tax regulatory system, enabling you to set up your business with confidence.
We can offer you tailor made solutions which will in turn minimize the tax liabilities and optimize your organization’s tax position. For more details or enquiries regarding types of business expenses for taxes or non deductible business expenses, call us at +97143577678 or mail us at info@nn-ca.com today!
