Corporate tax law and business expenses

• Corporate tax law and business expenses: The UAE has enacted a corporate tax law that applies to companies engaged in certain activities or sectors. The law requires companies to assess their business expenses and determine their taxable income. The law allows some deductions, exemptions, and reliefs, but also restricts or disallows certain expenses.

  
  

• Non-deductible fines and penalties for car rental industry: The law prohibits the deduction of fines and penalties, which include traffic fines imposed on vehicles. The car rental industry may face difficulties from the non-deductibility of fines and penalties for traffic violations committed by their customers, as this may increase their tax liability and reduce their profitability.

  
  

• Uncertainty over product samples and marketing gifts: The law also limits the deduction of donations, grants or gifts made to an entity, unless the entity is a qualifying public benefit entity. However, it is unclear if this limitation applies to donations or gifts made to individuals, such as product samples or marketing gifts. This may create uncertainty for businesses that use such promotional activities to generate sales and goodwill.

  
  

• Exclusivity requirement for business expenditure: Another condition for deducting business expenditure is that it must be incurred wholly and exclusively for the purposes of deriving taxable income. This may affect some industries that incur marketing expenses for products they do not manufacture or sell, such as advertising agencies or distributors. They may have to apportion their expenses based on a fair and reasonable basis to claim a deduction.

  
  

• Entertainment expenditure restriction for airline industry: The law also imposes a 50 percent restriction on the deduction of expenditure associated with entertainment of customers. shareholders, suppliers, and other business partners. This may include meals, accommodation, transportation, admission fees, and other expenses. The airline industry may face a 50 per cent restriction on the deduction of expenditure related to meals or transportation provided to its customers, which is considered as entertainment expenditure. This may increase their tax burden and affect their competitiveness.

  
  

• Interest capping rules and debt financing: The law also introduces a general interest limitation rule that limits the deduction of net interest expense to 30 per cent of tax-adjusted EBITDA or AED 12 million, whichever is higher. This rule applies to interest incurred on debt instruments, Islamic financial instruments, financial derivatives, and lease payments. The interest capping rules may affect the debt financing decisions of businesses, especially those that are highly leveraged or have thin capitalization.