Federal Tax Authority has released a Guide on Determination of Taxable Income in July 2024. This guide amongst other aspects provides general guidance for determining taxable income for calculation of tax payable.
This publication summarizes specific aspects of Deductible and Non-deductible expenditure, which needs to be considered at the time of computation of taxable income.
Determination of Taxable Income Guide – Key Takeaways
| No. | Expense Type | Key Takeaways |
|---|---|---|
| 1 | General Condition to claim deduction | • Must be incurred wholly and exclusively for business purposes (not exempt activities). • Must not be capital in nature. • Must be incurred in the Tax Period. • Arm’s Length Principle (ALP) must be satisfied for related party transactions. |
| 2 | Expenses to earn exempt income | • Not deductible. |
| 3 | Capital Expenditure | • Low-value assets may be expensed based on accounting policy. • Capitalized non-deductible expenses (e.g., fines, excessive commissions) – depreciation not deductible. |
| 4 | Expenditure for multiple purposes | • Must be apportioned on a fair and reasonable basis. • Consistent use of allocation key is required. • If not apportionable fairly, not deductible. |
| 5 | Pre-Incorporation and Pre-Trading Expenses | • Allowed if booked in accounts and not claimed by another person. • Pre-trading expenses allowed in the period incurred. |
| 6 | Provisions | • Allowed if made per IFRS. • Reversal is taxable. • Provisions for non-deductible items (e.g., bribes) are disallowed. |
| 7 | Bad debts, write-offs, and recoveries | • Deductible if written off. • IFRS provisions allowed. • Recoveries are taxable. |
| 8 | Employment-related expenses | • Generally deductible unless excessive. • Related Party payments must meet ALP. • Personal benefits (e.g., car, medical) are allowed. |
| 9 | Fines & Penalties | • Not deductible (e.g., traffic fines, VAT penalties). • Compensation for damages is allowed. • Provisions for fines (except contractual) are disallowed. |
| 10 | Entertainment Expenses | • Only 50% deductible for customers, suppliers, etc. • Includes meals, travel, accommodation, admission, equipment, etc. |
| 10A | Employee Entertainment | • Fully deductible. • Private events (e.g., weddings) not allowed. • Examples: Staff parties, away-days, rewards. |
| 10B | Incidental Expenses | • Incidental to business purpose – fully deductible. • E.g., refreshments in office or to customers. |
| 10C | Commercial Hospitality | • Part of business activity – fully deductible. • E.g., airline washbags, hotel promotions. |
| 10D | Marketing & Advertising | • Not considered entertainment. • Allowed: Advertising, promotions, sponsorships. • Not Allowed: Client hotel stays, sporting events. |
| 11 | Illicit Payments | • Bribes and other illicit payments not deductible. |
| 12 | Pension Fund Contributions | • Deductible up to 15% of employee’s remuneration. |
| 13 | Connected Persons | • Must have employment contract if active in business. • Salary/benefits must be at fair market value. |
| 14 | Input VAT | • Non-recoverable VAT on business expenses is deductible. • Non-business/personal VAT is not deductible. |
| 15 | Net Interest Expenditure | • Grandfathered interest not considered. • Trade payables/receivables included in Net Interest. • Use Adjusted EBITDA for calculation. |
| 16 | Tax Losses | • Offset against own income first. • Then can transfer or carry forward. |
| 17 | Taxes Paid | • Local municipal/property taxes deductible. • Taxes under Emirate Law not deductible. |
Need help with Corporate Tax Filing? Check out our Corporate Tax Services.
FOR MORE INFORMATION, CONTACT US :
Phone : +971 52 1952 532 / +971 4 240 1110
Mail-Id : info@yugaaccounting.com
Website : www.yugaaccounting.com