Think All Your Business Expenses Are Tax-Deductible in the UAE? Think Again.

With the introduction of UAE Corporate Tax under Federal Decree-Law No. 47 of 2022, many businesses assume that all operational costs are automatically deductible. In practice, the law permits a wide range of deductions—but with clear limits, exclusions, and conditions that are often overlooked.

The Fundamentals: What Is Generally Deductible

The Corporate Tax Law allows businesses to deduct expenses that are wholly and exclusively incurred for the purpose of the taxable person’s business. Typically deductible categories include:

• Salaries and wages

• Rent and office-related overhead

• Marketing and advertising costs

• Legal, accounting, and professional services

However, the deductibility of other costs is subject to statutory limitations and interpretive nuance.

Partial Deductions and Strict Limitations

Some expenses are only partially deductible or not permitted at all under the law:

• Client entertainment (e.g. meals, hospitality): Only 50% of the expense is deductible.

• Interest expenses: Deductibility is capped at 30% of EBITDA, subject to specific exemptions for low-leverage entities.

• Donations: Only deductible if made to approved public benefit entities listed by the Ministry of Finance.

• Fines and penalties: Explicitly non-deductible.

• Dividends paid and discretionary benefits not linked to core business activities are also excluded.

Failing to correctly categorize and justify such expenses may expose businesses to tax adjustments, penalties, and scrutiny by the Federal Tax Authority (FTA).

Free Zone Companies: A Special Case

Entities operating in designated Free Zones may qualify for 0% tax on eligible qualifying income, but this benefit is not unconditional. Inappropriate deductions or failure to comply with substance and reporting requirements can jeopardize the preferential regime.

It is critical for Free Zone companies to carefully track and substantiate:

• The nature and source of income

• Eligible transactions with mainland entities

• Operating expenses tied to the qualifying income stream

A misstep—such as claiming disallowed expenses or failing to meet economic substance criteria—can result in the loss of tax-exempt status.

Why It Matters

Navigating expense deductibility is not only a matter of tax efficiency—it is a compliance imperative. The FTA requires proper documentation and expects businesses to demonstrate that deductions claimed are legitimate, necessary, and substantiated.

The cost of getting it wrong is high: potential penalties, interest charges, and reputational risk, especially for companies operating across borders or within regulated sectors.

How Lex Consulta Can Assist

At Lex Consulta, we support UAE-based businesses and multinational groups in aligning their internal policies, expense frameworks, and documentation practices with current tax legislation. Our team provides:

• Legal analysis of deductibility under UAE Corporate Tax Law

• Review and restructuring of internal expense classifications

• Risk assessment for Free Zone compliance

• Ongoing advisory to ensure defensibility in the event of FTA review

  
  

If your business is not actively reviewing expense policies in light of the new tax regime, now is the time to act. Strategic tax planning begins with clarity—and compliance begins with understanding the details.

Contact our UAE team for a confidential consultation.