According to the Corporation Tax Act, expenses that do not constitute capital investments and that are carried out in full and exclusively for the purposes of the taxable person's business activity are, in principle, tax-deductible. However, the UAE Value Added Tax (VAT) Act imposes restrictions on the deduction of certain expenses to ensure that only those expenses incurred for the purpose of generating taxable income are deducted, and to prevent possible abuses or excessive deductions.

In the case of expenses with multiple purposes, the deduction of the identifiable part or proportion of the expenses that are allocated totally and exclusively to obtaining taxable income will be allowed. In addition, it will be possible to request the deduction for UAE Corporate Tax purposes of an appropriate proportion of any unidentifiable part or proportion of expenses, provided that such proportion has been determined on a fair and reasonable basis.

Depreciation and Amortization

The Corporate Tax Act (TC) of the United Arab Emirates (UAE) does not specifically address the tax treatment of depreciation and amortization.

Interest Expenses

In accordance with the United Arab Emirates Corporation Tax Act, net interest expenses (NIE) are deductible up to a limit of 30% of tax-adjusted profits before interest, taxes, depreciation and amortization (EBITDA). However, this limitation will not apply if the NIE for the tax period does not exceed the threshold of 12 million AED. If this threshold is exceeded, the taxable person may deduct the greater of the two amounts: the threshold or 30% of EBITDA.

For the purposes of the general rule of limitation of interests, the following concepts are considered interests:

• Amounts incurred in connection with obtaining funding, including guarantee fees, opening fees, commitment fees, and other fees of a similar nature.
• Interests in Islamic financial instruments that comply with the principles of sharia, or any equivalent instrument, or a combination of both.
• The interest component of forward contracts, futures contracts, options, interest rate and currency swap agreements, or any other derivative financial instrument.
• The financial element of payments for financial and non-financial leases.
• Foreign exchange earnings.

EBITDA is adjusted for the interest deduction as follows:

• NIE corresponding to the relevant tax period (excluding the one related to eligible infrastructure projects).
• Depreciation and amortization expenses considered to determine the taxable base for the corresponding tax period.
  
• Any interest income or expense related to historical financial assets or liabilities held before December 9, 2022.

If the calculated EBITDA is negative, the amount of EBITDA to be considered to determine the 30% limit will be 0 AED.

The NIE attributed to debt instruments whose conditions were agreed before December 9, 2022 is exempt from the application of the general interest limitation rule. In addition, NIEs incurred by qualified infrastructure projects are not subject to this limitation.

Interest limitation rules will not apply to banks, insurance companies and other regulated financial services entities. Nor will they apply to activities carried out by individuals or any other entity determined by a decision of the Council of Ministers.

The amount of the NIE whose deduction is denied under the interest limitation rules can be carried over to the next financial year and deducted in the following ten tax periods.

In addition to the general interest limitation rule, interest deduction will not be allowed if the loan was obtained, directly or indirectly, from a related party for any of the following transactions with that related party:

• Dividends or profit distribution
• Repayment, repurchase, reduction or return of the share capital.
• Contribution of capital.
• Acquisition of shares in a legal entity that is or becomes a related party after the acquisition.

Charitable contributions

Donations paid to entities other than public utility entities will not be considered deductible for UAE corporate tax purposes.

Representation Expenses

In accordance with the Corporation Tax Act (TC) of the United Arab Emirates (UAE), entertainment-related expenses of customers, shareholders, suppliers and other business partners, including meals, lodging, transportation, tickets, facilities and equipment used for such entertainment, can be deducted up to 50% of the total amount incurred. This deduction is subject to the limits and conditions specified by a Cabinet decision.

Other non-deductible expenses

Dividends/profit distribution and other expenses specified in the decision of the Council of Ministers will not be considered deductible for UAE corporate tax purposes.

Net Operating Losses

Under the Corporation Tax Act, companies can offset tax losses against taxable income from future tax periods by calculating the tax base for that period. The compensation for losses during any tax period cannot exceed 75% of the taxable income for that period, except in specific circumstances that may be established by a decision of the Council of Ministers. Remaining tax losses can be carried over indefinitely to subsequent tax periods.

It is not possible to claim compensation for tax losses for losses incurred before the entry into force, losses suffered before the entity became a taxable person under the Act, or losses derived from assets or activities whose income is exempt or is not considered under the IS Act.

The transfer of tax losses between legal entities of a group with tax residence is allowed if there is a common property of at least 75% and other conditions are met, such as having the same fiscal year and applying the same accounting rules, as well as not being an exempt entity or a Free Trade Zone for Special Qualification Companies (QFZP).

To avoid the transfer of tax losses through the transfer of ownership in the case of taxable persons not listed on a recognized stock exchange, the Act states that tax losses can only be transferred and used under the following conditions:

• The same person or persons have continuously held at least a 50% interest in the taxable person from the beginning of the tax period in which the tax loss was incurred until the end of the tax period in which the tax loss, or part of it, is offset by the taxable income of that period.
• The taxable person has continued to carry out the same or a similar activity after a change in ownership greater than 50%.