One of the most common questions UAE business owners ask is:

“What expenses can I actually deduct to reduce my corporate tax bill?”

Understanding the difference between deductible and non-deductible expenses can save your business thousands of dirhams in corporate tax. Yet many UAE businesses are either over-claiming (risking FTA penalties) or under-claiming (paying more tax than necessary).

In this comprehensive guide, we’ll break down exactly what you can and cannot deduct under UAE corporate tax law—with practical examples to help you maximize legitimate deductions.

The Golden Rule: Wholly and Exclusively for Business

Before diving into specific expenses, understand this fundamental principle:

An expense is deductible if it is incurred wholly and exclusively for the purposes of the business.

This means the expense must:

• Be directly related to generating taxable income
• Be incurred during the relevant tax period
• Be supported by proper documentation (invoices, receipts, contracts)
• Not fall under specifically prohibited categories

Fully Deductible Expenses (100%)

1. Employee Costs

⚠️ Watch Out: Owner salaries in sole establishments must be reasonable. Excessive amounts may be reclassified as profit distribution (non-deductible).

2. Office and Operating Expenses

3. Marketing and Advertising

4. Finance Costs

*Interest Deduction Limitation Rule: Net interest expense exceeding AED 12 million is limited to 30% of EBITDA. Small businesses rarely hit this threshold.

5. Depreciation and Amortisation

Capital assets cannot be deducted immediately, but you can claim relief through:

Key Point: The depreciation method used in your audited financial statements is generally accepted for tax purposes.

Partially Deductible Expenses

Entertainment Expenses: The 50% Rule

This is where many businesses make mistakes.

Rule: Only 50% of entertainment expenses related to customers, suppliers, shareholders, and other business partners is deductible.

Exception – 100% Deductible:

• Staff parties and team building (not client-related)
• Internal company events
• Employee meals during overtime

Example:
Your company spends AED 100,000 on client entertainment annually.

• Deductible amount: AED 50,000
• Add-back to taxable income: AED 50,000

Non-Deductible Expenses (0%)

These expenses cannot reduce your taxable income under any circumstances:

1. Dividends and Profit Distributions

2. Fines and Penalties

Note: Commercial late payment interest (e.g., to suppliers) IS deductible—only government penalties are blocked.

3. Illegal Payments

4. Donations to Non-Qualifying Organizations

Tip: Check the FTA’s list of Qualifying Public Benefit Entities before claiming donation deductions.

5. Personal and Non-Business Expenses

6. Provisions and Reserves (Generally)

Exception: Specific bad debts written off with proper documentation ARE deductible.

7. Related Party Transactions Above Market Value

If you pay a related party (e.g., parent company, sister company) more than arm’s length price, the excess is non-deductible.

Example:

• Market rate for management fee: AED 500,000
• Actual payment to parent company: AED 800,000
• Non-deductible portion: AED 300,000

Common Deduction Mistakes to Avoid

❌ Mistake 1: Claiming 100% Entertainment Expenses

Reality: Only 50% is deductible for client entertainment.

❌ Mistake 2: Deducting Owner’s Personal Expenses

Reality: Personal car, home expenses, and family costs are never deductible—even if paid through the business account.

❌ Mistake 3: Forgetting to Add Back Penalties

Reality: Government fines must be added back to taxable income.

❌ Mistake 4: No Documentation

Reality: Without proper invoices and records, the FTA can disallow any deduction.

❌ Mistake 5: Claiming Capital Expenses Immediately

Reality: Large asset purchases must be depreciated over time, not expensed in year one.

How to Calculate Your Deductions: Step-by-Step

Step 1: Start with your accounting profit (from audited financials)

Step 2: Identify all non-deductible expenses and ADD them back:

• 50% of entertainment
• Fines and penalties
• Non-business expenses
• Related party excess payments

Step 3: Identify exempt income and SUBTRACT:

• Qualifying dividends
• Exempt foreign income (if applicable)

Step 4: Result = Taxable Income

Step 5: Apply corporate tax rate:

• 0% on first AED 375,000
• 9% on amount exceeding AED 375,000

Maximizing Your Deductions: Pro Tips

✅ Tip 1: Keep Impeccable Records

Every deduction needs supporting documentation. Maintain:

• Original invoices
• Payment receipts
• Contracts and agreements
• Board resolutions for major expenses

✅ Tip 2: Review Entertainment Classifications

Separate internal staff events (100% deductible) from client entertainment (50% deductible).

✅ Tip 3: Time Your Expenses Strategically

If you’re near the AED 375,000 threshold, timing major deductible expenses can optimize your tax position.

✅ Tip 4: Document Related Party Transactions

Prepare transfer pricing documentation to defend arm’s length pricing.

✅ Tip 5: Use Proper Depreciation Schedules

Ensure your accounting depreciation rates are reasonable and consistently applied.

Deduction Checklist for UAE Businesses

Use this checklist when preparing your corporate tax return:

Fully Deductible (100%):

• Salaries and employee benefits
• Rent and utilities
• Professional fees
• Business travel
• Marketing expenses
• Insurance premiums
• Bank charges
• Depreciation

Partially Deductible (50%):

• Client entertainment expenses

Non-Deductible (Add Back):

• Owner drawings/dividends
• Government fines and penalties
• Personal expenses
• Non-approved donations
• Related party excess payments

Conclusion

Understanding what expenses you can deduct under UAE corporate tax is essential for minimizing your tax liability legally. The key principles are simple:

Don’t leave money on the table—but don’t risk penalties by over-claiming either.

Need Expert Help With Your Corporate Tax Deductions?

At STH Financial, our corporate tax specialists help UAE businesses:

✓ Identify all legitimate deductible expenses
✓ Prepare compliant tax calculations
✓ Avoid common deduction mistakes
✓ Optimize tax positions within legal limits
✓ Defend deductions during FTA audits

📞 Contact us today for a corporate tax consultation.

Get Expert Help | Visit STH Financial