Non-Deductible Expenses UAE Corporate Tax: A Comprehensive Guide for Businesses

In the evolving UAE corporate tax law landscape, the federal corporate tax (CT) regime, effective for financial years starting on or after June 1, 2023, under Federal Decree-Law No. 47 of 2022, imposes a 9% rate on taxable income—with 0% on income up to AED 375,000. This applies to UAE businesses, including free zone entities under certain conditions. Accurate computation of taxable income for corporate tax purposes relies on identifying deductible expenses versus non-deductible expenses under corporate tax. Misclassifying expenses incurred can inflate corporate tax liability, trigger penalties from the Federal Tax Authority (FTA), and invite audits—fines may reach AED 20,000. Businesses must maintain records for seven years, including invoices and contracts, to support tax filings and ensure compliance with UAE tax regulations.

This guide from Young & Right, a leading accounting and tax advisors firm in Dubai, explains non-deductible expenses for UAE corporate tax. We cover key principles, categories, special rules like interest limitation rules, and tax strategies to optimise your tax position. Whether you're a startup or multinational, learn which expenses are disallowed expenses, what qualifies as generally deductible, and how to distinguish deductible vs non-deductible items under the UAE CT law.

Understanding Tax Deductions in UAE Corporate Tax Law

Under Article 28 of the corporate tax law, an expense is considered deductible for corporate tax deduction if it meets three tests:

→ Wholly and Exclusively for Business Purpose: 

The expense must relate directly to generating taxable income. Any personal element makes it partially or fully one of the non-deductible expenses UAE corporate tax.

→ Revenue Expenses (Not Capital): 

Operational costs are immediately deductible, while capital expenditures (e.g., asset purchases) are not—though depreciation may apply. Capital expenditures fail this test and become disallowed expenses.

→ Apportionment for Mixed Use: 

For expenses related to both business and personal activities (e.g., a vehicle), only the business portion is deductible interest or otherwise deductible. Use fair methods like mileage logs. If unallocable, the full amount is non-deductible.

Expenses failing these become non-deductible expenses under corporate tax, increasing the tax base. UAE corporate tax deductible expenses must be segregated in accounts. Even taxable persons under the CT using a cash-basis accounting method (for revenue < AED 3 million) follow these corporate tax rules. Consult with tax experts to avoid errors in tax return preparation.

Non Deductible Expenses Under Corporate Tax Law

Under UAE law, the Ministry of Finance oversees the framework for corporate taxation, ensuring that only legitimate business expenses are eligible for deduction to accurately reflect taxable income. The law provides clear guidelines on what constitutes deductible items, while explicitly excluding certain categories to prevent abuse. As outlined in official resources, the guide explains that non-deductible expenses include those deemed personal, excessive, or unrelated to core business operations.

The main types of expenses that cannot be used to deduct against taxable profits encompass entertainment expenses, such as client hospitality or recreational activities not directly tied to revenue generation. Additionally, net interest expenditures exceeding prescribed thresholds are restricted, limiting deductions to maintain fiscal discipline. Businesses must carefully review these provisions to comply with UAE law and avoid penalties during tax assessments.

Main Categories of Non-Deductible Expenses under Corporate Tax

The UAE corporate tax law (Article 33), Cabinet Decision No. 55/2023, and Ministerial Decision No. 134/2023 list explicit non-deductible expenses for UAE corporate. Future law changes may add more. Here's a breakdown with examples and implications for staying compliant with UAE tax laws and regulations.

🔹Bribes, Fines, and Penalties

Illegal payments or violations are 100% non-deductible (Article 33(1)(a)). This includes bribes, traffic fines, or late VAT penalties. Depreciation on bribe-acquired assets is also disallowed. Reimburse personally to keep these out of business expenses.

🔹Donations to Non-Qualifying Entities

Gifts to unapproved organizations are non-deductible (Article 33(1)(b)). Only qualifying public benefit entities allow deductions, capped at 10% of adjusted taxable income. Foreign or unregistered donations offer no tax benefits.

🔹Expenditures for Exempt Income

Costs generating exempt income (e.g., dividends) are non-deductible (Article 33(1)(c)). Apportion mixed expenses; related parties transactions invoke transfer pricing to prevent excess claims.

🔹Non-Business Losses or Expenses

Unrelated losses (Article 33(1)(d))—personal, hobby, or capital losses—are non-deductible. Trading losses can carry forward unlimited to offset against taxable income of subsequent tax periods, but not capital losses against trading income.

🔹Dividends and Profit Distributions

All payouts to shareholders are non-deductible (Article 33(1)(e)), preventing double non-taxation.

🔹Input VAT Eligible for Recovery

Recoverable VAT is non-deductible for corporate tax purposes (Article 33(1)(f)). Only irrecoverable VAT reduces the base.

🔹Interest Exceeding Safe Harbour Limits

Under Article 30 and general interest deduction limitation, interest expenditure exceeds 30% of earnings before interest, tax, depreciation, and amortization (EBITDA) or AED 12 million is non-deductible. Exceptions for certain lenders; carry forward for five years. Interest expenses from related parties face thin capitalization scrutiny. This is a key interest limitation rules area for tax efficiency.

🔹Entertainment Costs

Client entertainment costs are 50% deductible (Article 32). Staff events may be 100%—document attendees to claim full tax deduction.

🔹Personal Expenses

Shareholder personal costs (travel, groceries) are non-deductible to that extent. Apportion expenses for UAE corporate tax.

🔹Capital Expenditures

Asset buys are capital, not deductible expenses (Article 28). Use depreciation; proportional if tied to non-deductibles.

🔹Pre-Incorporation Expenses

Costs before a business became a taxable person are generally non-deductible unless post-incorporation.

🔹Special Considerations and Apportionment

Mixed expenses default to non-deductible if unapportionable. Related parties must be arm's-length. For permanent establishments, head office costs are deductible only if arm's-length. Law disallows excessive allocations. Offset tax losses from trading activities against taxable income of subsequent tax periods for future tax relief.

Strategies for Optimising Tax Deductions from Young & Right

To optimize your tax strategy and minimize your overall tax bill:

1. Strong Record-Keeping: 

Implement FTA-compliant software to track and categorize expenses accurately, enabling seamless and error-free tax filings.

2. Avoid Penalties: 

Misclassifying non-deductible items can trigger severe penalties—ranging from 100-200% on underpaid tax. Our team ensures precise reporting to keep you penalty-free.

3. Tax Strategies:

→ Re-categorize eligible entertainment costs as staff-related for full deductions.

→ Properly trace expenses to exempt income sources.

→ Leverage loss carry-forwards to offset future taxable income.

4. Seek Expert Guidance: 

Partner with our tax professionals for complex areas like interest expenditure caps, transfer pricing documentation, or determining when a person becomes a taxable entity under CT law.

5. Stay Updated: 

We monitor the latest from the FTA and Ministry of Finance, including key resources like the CTGDTI1 Guide (July 2024), to keep your business ahead of regulatory changes.

Comparison between Deductible vs. Non Deductible Expenses

Under UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), the deductibility of expenses is governed by Article 28. An expense qualifies as deductible only if it is incurred wholly and exclusively for business purposes, is revenue in nature (not capital), and, in cases of mixed use, is reasonably apportioned to business activities. Expenses failing these tests are non-deductible under Article 33, increasing the taxable income subject to the 9% corporate tax rate (0% on income up to AED 375,000).

Deductible Expenses

Deductible expenses are those directly linked to generating taxable business income and operational in nature. Examples include salaries, utilities, business travel, and office rent. Staff entertainment costs are fully deductible if properly documented, while client entertainment is limited to 50% deductibility. Interest expenses are allowed up to the higher of 30% of EBITDA or AED 12 million, with excess amounts carried forward for five years. Capital assets are not immediately deductible but qualify for depreciation over time.

Non-Deductible Expenses

Certain expenses are explicitly disallowed under Article 33 to prevent abuse and ensure tax accuracy. These include bribes, fines, penalties, and donations to non-qualifying entities. Personal expenses of shareholders, recoverable input VAT, corporate tax payments, and dividends or profit distributions are fully non-deductible. Costs incurred to generate exempt income (such as dividends) or unrelated personal losses also fall into this category. Capital expenditures and pre-incorporation costs are generally non-deductible unless tied to depreciable assets.

How Young & Right Can Help You with Non-Deductible Expenses in UAE Corporate Tax

At Young & Right, we guide businesses through UAE’s corporate tax system, from identifying non-deductible expenses to maintaining tax compliance and optimizing your taxable base. Our experts ensure items like fines, personal expenditures, or unrelated costs are properly excluded under the CT law, while any expenses to ensure they are linked to revenue-generating activities for a person under the CT law may still reduce your base if eligible for tax treatment. We help you navigate these restrictions to minimize risks, avoid penalties, and turn tax compliance into strategic efficiency.

1. Non-Deductible Identification: 

Precise Classification We scrutinize all expenses under UAE’s corporate tax to flag non-deductible items such as fines, penalties, personal expenditures, or bribes, ensuring they are excluded from deductions as per the CT law. Our detailed reviews for a person under the CT law confirm only revenue-linked costs qualify, preventing FTA disallowances and safeguarding tax compliance.

2. Risk Mitigation & Restructuring: 

Proactive Avoidance We identify and restructure potential non-deductible expenses to ensure compliance, such as excessive entertainment, donations outside exemptions, or non-business assets. Tailored strategies for mainland and free zone entities minimize exposure under the tax system, reducing audit risks and preserving your overall tax position.

3. Revenue-Linkage Optimization: 

Strategic Alignment For expenses to ensure partial relief, we link costs to revenue-generating activities where permissible under UAE’s corporate tax, allowing them to reduce the taxable base for a person under the CT law. Apportionment models and documentation frameworks ensure only eligible for tax portions are claimed, enhancing efficiency without triggering adjustments.

4. Fines & Penalty Management: 

Compliance Safeguards We classify and segregate fines, penalties, or infringing payments as fully non-deductible, providing FTA-compliant reporting to avoid double taxation pitfalls. Preventive advisory under the tax system helps implement policies that deter such costs, maintaining tax compliance and long-term fiscal health.

5. Personal Expenditure Exclusion: 

Clear Segregation From owner drawings to family-related costs, we ensure personal expenditures are treated as non-deductible under the CT law, with robust allocation rules for mixed-use items. This protects deductible claims for business elements, ensuring expenses to ensure eligible for tax status only where justified for a person under the CT law.

6. Related-Party & Arm's-Length Testing: 

Transfer Pricing Defense We apply arm's-length principles to related-party transactions, flagging non-deductible elements like inflated costs or non-commercial terms. Compliance roadmaps under UAE’s corporate tax minimize disallowances, supporting tax compliance and optimizing the taxable base amid group structures.

7. Ongoing Monitoring & FTA Alignment: 

Adaptive Oversight Quarterly audits, real-time expense tracking, and updates on CT law clarifications keep non-deductible items isolated amid evolving tax system rules. This ensures sustained tax compliance, facilitates voluntary disclosures, and provides expenses to ensure your position remains eligible for tax optimization without surprises.

Conclusion: 

At Young & Right, we empower businesses—from startups in Dubai's free zones to multinationals—to transform tax compliance into a competitive advantage. Our expert team handles everything from precise expense classification and risk restructuring to arm's-length transfer pricing and ongoing FTA-aligned monitoring, ensuring you avoid common pitfalls and maximize eligible deductions. Don't leave your tax position to chance in an evolving regulatory landscape—partner with us today for tailored guidance that minimizes liabilities, prevents penalties, and drives long-term efficiency.