Quick Answer
Under Federal Decree-Law No. 47 of 2022, an expense is deductible for UAE Corporate Tax if it is incurred wholly and exclusively for the business and is not of a capital nature. Most operating costs qualify in full. Entertainment spending on customers and suppliers is capped at 50% of the amount incurred. Net interest expense above AED 12,000,000 is capped at 30% of tax-adjusted EBITDA. Fines, bribes, dividends, and donations to non-qualifying entities are never deductible, regardless of how the expense is recorded.
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The General Deduction Rule
Article 28 of the Corporate Tax Law sets the baseline test: an expense reduces taxable income only if it is incurred wholly and exclusively for the purposes of the taxable person’s business, and it is not capital in nature. Where an expense serves a mixed purpose, part business and part personal, only the identifiable business portion is deductible, and the taxpayer carries the burden of showing that split with proper records. Capital expenditure, spending that creates an asset with lasting value such as property, equipment, or goodwill, is not deducted as an expense in the year incurred; it is instead recovered over time through depreciation or amortisation under the applicable accounting treatment.
Expenses That Are Deductible in Full
The majority of day-to-day operating costs qualify without restriction, provided they meet the wholly-and-exclusively test. This includes staff salaries and benefits, office rent, utilities, marketing and advertising spend, professional fees for accounting, audit, and legal services, and standard business travel. General provisions for doubtful debts are deductible where specific criteria around the debtor relationship and write-off basis are met, and most ordinary financing costs are deductible subject to the interest capping rule below.
Expenses That Are Capped, Not Banned
Two categories of legitimate business expense are deductible only up to a limit, the spend is real and business-related, but the law restricts how much of it reduces taxable income.
Entertainment Expenses: Capped at 50%
Costs incurred to entertain customers, shareholders, suppliers, and other business partners, meals, accommodation, admission to events, and similar hospitality, are deductible at only 50% of the amount actually incurred. The remaining 50% is added back when calculating taxable income, regardless of how ordinary or justifiable the spend was for maintaining the business relationship.
Interest Expense: Capped at 30% of Tax-Adjusted EBITDA
Net interest expenditure is deductible up to 30% of tax-adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation). A de minimis threshold of AED 12,000,000 in net interest expense applies first, if net interest expense for the period does not exceed AED 12,000,000, this general interest capping rule does not restrict the deduction at all. Interest disallowed under the 30% cap is not lost permanently; it can be carried forward and deducted in future tax periods, generally up to ten years, subject to the same 30% test applying in each of those later periods. A separate, stricter rule denies interest deductions on certain related-party loans used to fund dividends, share buybacks, capital contributions, or acquisitions of a related party, unless the lender itself is subject to Corporate Tax at 9% or higher on that interest income. Check: Corporate Tax Consultants in Dubai, UAE
| Expense Category | Deduction Treatment | Limit / Condition |
|---|---|---|
| Salaries, rent, marketing, professional fees | Deductible in full | Must meet wholly and exclusively test |
| Client and supplier entertainment | Deductible at 50% | Remaining 50% added back to taxable income |
| Net interest expense | Deductible up to 30% of tax-adjusted EBITDA | No cap applies if net interest is under AED 12,000,000 |
| Fines, penalties, bribes | Not deductible | No exceptions |
| Dividends and profit distributions | Not deductible | Treated as a distribution of profit, not a cost of earning it |
| Donations to non-qualifying entities | Not deductible | Deductible only if paid to an FTA-approved Qualifying Public Benefit Entity |
| Recoverable input VAT | Not deductible | Already recovered through the VAT system, cannot also reduce Corporate Tax |
Expenses the FTA Will Never Allow
Article 33 sets out a fixed list of expenditure that is never deductible, regardless of business purpose or documentation quality: fines and penalties, bribes and other illicit payments, dividends and other profit distributions, donations or gifts made to an entity that is not an FTA-approved Qualifying Public Benefit Entity, and input VAT that is recoverable under the UAE VAT law. Contribution to this list also includes expenditure that is not incurred wholly and exclusively for the business, meaning personal or non-business spending run through a company’s books does not become deductible just because it passed through a business bank account. Check: Corporate Tax Registration Services
Worked Example
A Dubai-based trading company reports AED 2,000,000 in accounting profit for the period. Included in its expenses are AED 120,000 spent entertaining key overseas suppliers during a buying trip, and AED 8,000,000 in net interest expense on a working-capital facility, against tax-adjusted EBITDA of AED 20,000,000 for the same period. The entertainment spend is capped at 50%, so AED 60,000 is added back to taxable income. The interest expense sits below the AED 12,000,000 de minimis threshold, so no interest capping add-back applies at all. Taxable income before the AED 375,000 zero-rate band is therefore AED 2,060,000, taxed at 0% on the first AED 375,000 and 9% on the remaining AED 1,685,000, a Corporate Tax liability of AED 151,650. Check: Corporate Tax Return Filing
Record-Keeping Behind Every Deduction
Every claimed deduction must be supported by documentation that ties the expense to the business purpose, invoices, contracts, board approvals for larger items, and a clear allocation basis for any mixed-purpose cost. UAE Corporate Tax law requires these records, along with the return itself, to be retained for 7 years from the end of the relevant tax period. Records that do not survive an FTA request are treated as if the deduction cannot be substantiated, which can convert a legitimate expense into a disallowed one purely on a documentation failure rather than a substantive one.
Frequently Asked Questions
Is depreciation on office equipment a deductible expense?
Depreciation itself is an accounting concept, not a direct tax deduction line. UAE Corporate Tax generally follows the accounting treatment under IFRS for capital assets, meaning the depreciation expense recognised in the financial statements is allowed, subject to any specific adjustments the Corporate Tax Law requires for particular asset classes.
Can a free zone company deduct expenses the same way as a mainland company?
The deduction rules under Article 28 to 33 apply the same way across mainland and free zone taxable persons. What differs for a Qualifying Free Zone Person is the rate applied to qualifying income, not the mechanics of which expenses are deductible.
Are salaries paid to owners or related parties fully deductible?
Yes, provided the amount reflects an arm’s length payment for services actually performed and is not disguised profit extraction. Related-party transactions, including owner remuneration, remain subject to transfer pricing documentation requirements.
What happens if entertainment and business travel are combined in one invoice?
The taxpayer needs to apportion the invoice between the deductible travel component and the 50%-capped entertainment component. An undivided invoice that mixes both is treated conservatively, with the entertainment cap applied to any portion that cannot be clearly separated.
Does the interest capping rule apply to a small business under Small Business Relief?
A taxable person electing into Small Business Relief, available where revenue does not exceed AED 3,000,000 for tax periods ending on or before 31 December 2029, is treated as having no taxable income for the period, so the interest capping and entertainment capping mechanics are not relevant while that election is in place.
Tax Consultant Dubai
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How Tax Consultant Dubai Can Help
We review your expense ledger line by line against Articles 28 to 33, flag anything capped or disallowed before your return is filed, and build the interest capping calculation correctly where financing costs are material.
Contact Tax Consultant Dubai today to have your deductible expenses reviewed before your next corporate tax filing.
