Non Deductible Business Expenses for UAE Corporate Tax: 10 Facts to Know

Introduction

As businesses in the UAE adapt to the newly introduced corporate tax system, understanding which expenses can be deducted is essential for managing tax liabilities effectively. Article 28 of the UAE Corporate Tax Law states that for an expense to be deductible, it must meet two primary criteria: 1) it must be incurred wholly and exclusively for the taxable person’s business, and 2) it must be revenue rather than capital in nature.

While many business expenses are deductible, Article 33 of the Corporate Tax Law explicitly lists certain non deductible business expenses that cannot be deducted when calculating taxable income. This article provides an essential guide to understanding which expenses fall into this category.

Top 10 Non Deductible Business Expenses for UAE Corporate Tax

1. Personal Expenses Are Considered Non Deductible Business Expenses

Some expenses may serve multiple purposes. In such cases, the costs can be apportioned for Corporate Tax purposes. A prevalent example of non deductible business expenses under UAE tax regulations is personal expenses. Costs not directly associated with business operations, like personal use of company vehicles or other assets, are not deductible. It’s crucial to maintain clear distinctions between personal and business expenses in your accounting records to prevent complications during tax filing.

WellTax can assist your business in setting up proper accounting systems to differentiate between personal and business expenses, ensuring that tax filings are accurate and compliant.

2. Expenses Related to Tax-Exempt Income

When your business generates income that is exempt from UAE corporate tax, any expenses linked to that income will also be considered non deductible. For example, if your company earns tax-exempt foreign income through a participating interest (subject to specific conditions), the associated costs cannot be deducted from your taxable profits.

3. Non-Business-Related Losses

Losses that are not connected to your business operations, such as those from non-business investments or activities, are non deductible. Likewise, losses resulting from personal investments made by business owners, rather than the business itself, cannot be claimed as deductions.

At WellTax, we help you structure your business activities to minimize non-deductible losses while ensuring that legitimate losses are claimed appropriately in your corporate tax filings.

4. Fines and Penalties Are Not Deductible

Any expenses associated with fines and penalties due to violations of laws and regulations are non deductible. Whether it’s traffic fines or penalties for failing to comply with industry-specific rules, these costs cannot be deducted from your taxable income. This rule encourages compliance with the legal framework in the UAE and prevents businesses from using fines to lower their tax obligations.

Crucial Update: It is essential to understand that this non-deductibility rule now explicitly includes any government-imposed interest. As clarified in the FTA’s guidance in April 2025, any interest charged on the late payment of statutory dues (such as taxes, customs duties, or other government fees) is treated as a penalty under the Corporate Tax Law. Therefore, this interest is also a non-deductible business expense and cannot be claimed against taxable income.

5. Bribes and Other Illegal Payments Are Non Deductible

UAE corporate tax regulations strictly prohibit the deduction of expenses related to illegal activities, including bribes and other illicit payments. Engaging in such practices not only results in non deductible business expenses but also exposes companies to serious legal repercussions.

6. Irrecoverable VAT is Non Deductible

A business may occasionally incur irrecoverable VAT, which refers to the VAT paid on certain expenses (inputs) that cannot be reclaimed through the VAT return. As a result, this amount becomes part of the total cost to the business. If the irrecoverable VAT relates to a non deductible business expense for Corporate Tax purposes, such as an item used exclusively for non-business activities, then no deduction can be claimed for Corporate Tax.

WellTax provides VAT & Indirect Tax advisory services to help your business navigate the complexities of VAT in the UAE, ensuring that only valid VAT expenses are claimed in your tax filings.

7. Entertainment Expenses as Non Deductible Business Expenses

Costs incurred for entertaining customers, shareholders, suppliers, or other business partners are often deemed non deductible business expenses, as entertainment expenditures usually have both business and non-business elements. Consequently, while a deduction is allowed for entertainment costs, it is limited to 50% of the total expenditure, classifying the remaining 50% as non deductible business expenses. However, this 50% limitation does not apply to expenses for staff entertainment, which are fully deductible.

8. Interest Expenditure

Interest paid on loans taken for business purposes is generally deductible. However, this is one of the most complex areas of the UAE Corporate Tax Law. Failure to comply can result in the interest being deemed a non-deductible business expense.

Broadening the Scope (FTA Guidance on Interest Deduction Limitation Rules, April 2025): The rules apply to much more than just bank loans. The FTA clarified that “Interest” is interpreted broadly and includes costs like arrangement fees, guarantee fees, profits from Islamic financing, finance lease components, and even penalties on non-performing debt.

The Order of Restriction: To determine the final deductible amount, businesses must apply rules in a strict order:

1. General Deductibility: Is the cost wholly and exclusively for the business?

2. Arm’s Length Principle: Are the rates and terms on related-party loans market-based? (Any excess is non-deductible).

3. Specific Interest Limitation (SIDLR): Interest from related-party loans used for certain non-business purposes (like paying a dividend) is automatically non-deductible.

4. General Interest Limitation (GIDLR): Only after the above restrictions are applied, the final “net interest” amount is subjected to the limit of 30% of EBITDA or AED 12 million (whichever is higher).

Compliance Alert: A critical element to note is that if a business’s related-party transactions (including certain interest expenses) exceed AED 40 million in a Tax Period, the business must file a Transfer Pricing Disclosure Form (TPDF). This is a significant compliance trigger tied directly to ensuring interest is deducted correctly.

9. Donations and Charitable Contributions

Not all donations or charitable contributions qualify for tax deduction. Only those made to approved Qualifying Public Benefit Entities (QPBE) as listed in Cabinet Decision No. 37 of 2023 are deductible from taxable income. Contributions to organizations that are not approved, even if they support a charitable cause, will be classified as non deductible business expenses.

10. Capital Expenditures

Expenses for acquiring assets such as property, equipment, or vehicles intended for long-term use in the business fall under capital expenditures. These costs cannot be deducted immediately as business expenses in the year they are incurred. Instead, they must be capitalized and then amortized or depreciated over the asset’s useful life, rendering them non deductible in the year of purchase. However, once amortization and depreciation are accounted for, they can be recognized as operating expenses and deducted, provided they meet the conditions for deductibility.

WellTax can assist in classifying and managing your capital expenditures to ensure that amortization and depreciation are handled correctly for tax purposes.

It is important to note that not all expense recorded in a company’s profit and loss account will be allowed as a deduction for tax purposes. Expenditure that does not meet the criteria of being incurred wholly and exclusively for business purposes and being revenue in nature are considered non deductible. Expenses not specifically categorized as non deductible will only qualify as allowable expenditures if they comply with Articles 28 to 33 of the Corporate Tax Law.

Staying Compliant with UAE Corporate Tax

Understanding what constitutes non deductible business expenses is vital for your company to remain compliant with UAE tax law, minimizing the risk of penalties and enhancing overall tax management. As the tax landscape in the UAE evolves, staying informed about changes in regulations is essential for maintaining compliance and reducing unnecessary tax liabilities.

To minimize the risk of penalties and ensure proper tax management, businesses must carefully track and classify their expenses. Consulting with a corporate tax expert is key to optimizing tax filings and staying compliant with evolving UAE tax laws. If you want to learn more about how WellTax can assist your business in maximizing tax efficiency, explore our corporate tax advisory services here.

Conclusion

Staying informed about the expenses that cannot be deducted for corporate tax purposes in the UAE is crucial for any business seeking to optimize its tax filings. By avoiding these common pitfalls and seeking professional guidance, you can ensure that your company’s tax strategy is both compliant and effective.