What are some of the Non-Deductible Expenses & Loss offsetting rules | 9% UAE CT| Public Consultation Document

Here we will discuss the aspects of the CT (corporate tax) consultation document, released by the MOF that discusses, non-deductible expenses, offsetting losses, and the interest capping rules. The objective of these restrictions in reducing the tax liability is to make sure that no taxable person takes undue advantage of the CT regime or makes excessive deductions.

If non-deductible expenses are wrongly deducted in the taxable income calculation, the tax liability will reduce and we can be fairly confident that there will penalties for the same.

Bottom Line

The main purpose of the corporate tax regime to bring on restrictions for deducting certain expenses is to make sure that there is no abuse or excessive deductions made by businesses.

Interest Caping Rules

Businesses may try to abuse the corporate deductions by getting financed by loans and using the interest rates as deductions. They may get the loans from a related party that is not taxed at 9% to make use of this benefit. So the following is being proposed in the consultation document-

  1. The interest deductible cannot cross 30% of EBITDA ( Earnings before interest taxes and depreciation). This means that amounts higher than 30% will be non-deductible.
  2. There will be a base minimum deductible that will be allowable, even if is more than 30% EBITDA
  3. Related party borrowings can be deducted only if there is a valid commercial reason, and the tax rate for the lending party is at least 9%.

This being said the corporate tax regime plans on bringing some considerations for a consolidated group of companies. 

Additionally, the following are not going to be limited by the interest capping rules-

1) Banks

2) Insurance business

3) Regulated Financial Services

4) Other regulated financial services entities

5) Businesses carried out by natural persons

Other Non-Deductible expenses

We have discussed earlier, Free Zone companies and their corporate tax impacts. Payments made to Free Zone companies that are taxed at 0% are non-deductible expenses unless the payment is related to a mainland branch of the Free Zone company. 

Another restriction on expense deduction is that businesses will only be able to deduct 50% of the expenses incurred to entertain –

1) Shareholders,

2) Customers,

3) Suppliers &

4) Other business partners

The obvious reason for this is that there is a personal element related to this. The specifics of what is treated as entertainment are not known yet. 

Additionally, expenses related to administrative penalties and recoverable VAT are non-deductible.

Finally, any donations made to organizations that are not approved charities or public benefit organizations are non-deductible expenses as well.

Offset Losses with Future Profits

The intention of the corporate tax regime is to tax the net income over the life of the company, therefore there are generous loss deduction rules. 

1) Loss can be carried forward indefinitely

2) Losses can be offset to a maximum of 75% of each year’s taxable income.

In order to carry forward the losses indefinitely, the same shareholders must hold at least 50% of the share capital from the period of the loss. If the shareholding changes, the new shareholders should continue to same or similar business. This requirement does not exist for businesses listed on the stock exchange. 

There will be no loss carry forward relief in the following cases –

1) Losses before the implementation of corporate tax

2) Losses before becoming a taxpayer of corporate tax

3) Losses incurred from activities that are incurred from activities or assets that generate exempt income.

4) Losses incurred by Free Zone companies that do not have a permanent establishment on the mainland

In summary we have discussed that 30% of EBITDA can be deducted for interests expenses, the expenses that are not allowed to be deducted are to ensure that thereis no abuse of the system, and finally there are some generous rules that we can expect to offset losses with future profits

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