In the UAE corporate tax system, taxable income is calculated according to accounting rules. There are, however, certain expenses that cannot be deducted under the proposed corporate tax regime in the United Arab Emirates. While preparing a tax planning strategy, Dubai corporate tax consultants recommend considering interest capping rules and nondeductible expenses. Several non-deductible expenses as well as interest capping rules have been introduced that were designed to ensure that relief can only be claimed for expenses that are incurred to generate taxable income and for no other purpose.
In addition, the new rule will enable the government to respond to the possibility of abuse and excessive deductions. In the wake of the long-awaited UAE Corporate Tax Law being issued, corporate tax uae advisors advise businesses to take proactive measures.
Here in this blog, we are going to dissect the key aspects of the UAE corporate tax Federal decree law regarding non-deductible expenses and interest capping. For more information, keep reading:
Rules for capping interest on UAE corporate taxes
In accordance with the federal decree law for the UAE corporate tax regime, net interest expense can be deducted up to 30% of an entity’s Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA), which has been adjusted for corporate tax. Based on the Base Erosion and Profit Shifting project’s Action 4, this capping rule is aligned with the interest capping rules. There is, however, a safe harbor or de minimis amount for businesses to deduct net interest expenditures regardless of the interest deductibility limit based on EBITDA. Businesses may benefit from the guidance of corporate tax consultants in Dubai.
Rules pertaining to interest capping exceptions
In terms of corporate taxation in the UAE, it is recognized that each industry has a different capital requirement and different risk profile. In Dubai, corporate tax advisors are able to advise business owners about how to navigate the exceptions to interest capping rules.
As a result of this exception, businesses in the following categories will not be subject to the interest capping rules:
- Banks
- Businesses carried on by natural persons
- Regulated financial services entities
- Insurance businesses
Rules for capping interest rates in consolidated groups
An interest capping threshold is allowed for businesses that belong to a consolidated group based upon the group’s overall financial position. When related party borrowings are used for certain intra-group transactions, such as the payment of dividends or capitalizations of group companies, UAE corporate tax regimes require interest on those borrowings to be at arm’s length. It should be noted, however, that related party interest can only be deducted when there is a valid commercial reason for doing so. Accordingly, the related party lender must be subject to corporate tax (or equivalent) of at least 9% on interest income in order for this to be considered a valid commercial reason. To learn more about interest capping rules for consolidated groups, businesses can consult with corporate tax consultants in Dubai.
Expenses that are not deductible under corporate tax
There are certain expenses that cannot be deducted under the UAE corporate tax regime. Businesses can seek advice on non-deductible expenses from corporate tax advisors in Dubai. To understand the UAE corporate tax regime, consider the following expenses that aren’t deductible:
- Tax-free payments to a Free Zone Person are not deductible for CT purposes if the income is taxed at 0% upon receipt. Regardless, related parties can claim a deduction if the payments are attributed to mainland branches of the Free Zone Person.
- To acknowledge that these types of expenses often include personal elements as well as business, businesses will be able to deduct up to 50% of the expenditures they incur to entertain their customers, shareholders, suppliers, and business partners.
- In addition to these general expenditures, certain specific expenses will not be deducted, such as administrative penalties, recoverable VAT, and donations paid to an organization which is not a charity or a public benefit organization, and which is not an approved charity.
Consult with the Best Corporate Tax Consultants in Dubai, UAE
Farahat and Co. specializes in advising individuals and businesses about corporate tax provisions such as interest capping regulations and non-deductible expenses in Dubai. These provisions aim to prevent taxable persons from taking advantage of the UAE corporate tax regime unfairly or making excessive deductions.
Business owners in Dubai can rely on our corporate tax advisor team to assist them in complying with the corporate tax regime’s complex provisions.
In our role as Corporate Tax Consultants, offer CT Assessment & Advisory Services (one-time or retainer basis), CT Compliance Services, and CT Agent Services in case of any notices served by the Federal Tax Authority (FTA) of UAE. With corporate tax services in Dubai, UAE, businesses can comply with the UAE corporate tax hassle-free and avoid relevant penalties. experts also offer customized tax solutions to help businesses comply with the UAE corporate tax efficiently.
