UAE Corporate Tax (CT) applies a 9% rate on taxable income above AED 375,000. But your taxable income is not the same as your gross revenue — it's your revenue minus allowable deductions. Knowing which expenses qualify, and how to document them properly, can make a significant difference to your CT liability.
General Rule: What Makes an Expense Deductible?
Under Federal Decree-Law No. 47 of 2022, an expense is deductible if it is wholly and exclusively incurred for the purpose of the business, and it is not specifically disallowed. The expense must also be properly documented — the FTA can request supporting invoices, contracts, and bank records during an audit.
Key rule: Personal expenses, owner drawings, and costs unrelated to business operations are NOT deductible — even if paid from the business account.
Common Allowable Deductions for UAE SMEs
- Staff salaries, wages, bonuses, and end-of-service gratuity (EOSB)
- Office rent, utilities, and facilities costs
- Business insurance premiums
- Professional fees (accounting, legal, consultancy)
- Marketing and advertising expenses
- Depreciation on fixed assets (equipment, vehicles, leasehold improvements)
- Bank charges and financing costs (subject to interest limitation rules)
- Travel and business entertainment (with caveats)
- IT infrastructure, software subscriptions, and cloud services
Salary and Employment Costs
Salaries paid to employees are fully deductible, including basic pay, housing allowances, transport allowances, and end-of-service gratuity accruals. Pension contributions to the GPSSA for UAE national employees are also deductible. However, excessive remuneration paid to related parties (e.g., owner-directors) may be scrutinised — it must reflect market rates.
Interest and Finance Costs: The 30% EBITDA Rule
UAE CT introduces an interest limitation rule for businesses with net interest expenditure above AED 12 million. For most SMEs, all genuine interest costs on business loans are deductible. However, interest paid to related parties or on loans used for non-business purposes may be challenged. Keep loan agreements and purpose documentation on file.
Entertainment and Hospitality: 50% Cap
Client entertainment — meals, events, gifts — is only 50% deductible under UAE CT. This mirrors international norms and is strictly enforced. Maintain records of the business purpose, attendees, and cost for every entertainment claim. Without documentation, the FTA can disallow the full amount.
What Is NOT Deductible
- Owner drawings or dividends paid to shareholders
- Personal expenses paid through the business
- Fines and penalties (including FTA penalties)
- Bribes or illegal payments of any kind
- Expenses related to exempt income (e.g., qualifying dividends)
- Capital expenditure — claimed through depreciation instead
- Donations to non-approved entities
Depreciation and Capital Allowances
Capital assets (computers, machinery, vehicles, fit-outs) cannot be expensed in full in the year of purchase. Instead, their cost is spread over their useful life via depreciation. UAE CT generally follows IFRS depreciation methods. Keep a fixed asset register updated with purchase dates, costs, depreciation rates, and book values.
Related Party Transactions: Transfer Pricing Rules
Payments made to related parties — directors, shareholders, group companies — must be at arm's length (market rate). The FTA has transfer pricing rules aligned with OECD guidelines. If you pay a related party above market rate, the excess is non-deductible. Maintain transfer pricing documentation for transactions above AED 4 million per year with any single related party.
Practical tip: Keep a separate expense ledger for each deduction category. When your accountant prepares your CT return, clean records mean faster preparation and lower risk of FTA queries.
How to Maximise Your Deductions Legally
- 1Ensure every business expense is supported by an invoice or receipt
- 2Separate personal and business accounts — never mix them
- 3Record the business purpose for entertainment and travel costs
- 4Maintain a fixed asset register with depreciation schedules
- 5Review related-party payments annually to confirm arm's-length pricing
- 6Work with an FTA-registered accountant to review your CT position before filing
Our team prepares UAE Corporate Tax returns for SMEs across all sectors. We review your expense ledger, identify all allowable deductions, and ensure your filing is accurate and FTA-compliant. Message us on WhatsApp for a free 15-minute consultation.