UAE corporate tax business expenses: a deduction review process

A business payment is not automatically a corporate tax deduction. The preparer needs to establish what was purchased, whose business it served, how it was recorded and whether a specific restriction applies. A bank description such as “office cost” is a starting clue, not the evidence behind a tax treatment.

The FTA’s Determination of Taxable Income guide explains the general deduction framework and common restrictions. Use it to build a review process around actual transactions. This article focuses on that process; an unfamiliar transaction should become a precise question for review rather than being forced into a familiar expense code.

Apply the business-purpose test to the right person

Start by identifying what the supplier provided and which legal person’s business benefited. Retain the invoice, agreement or order and evidence that the goods or services were received. If one company pays a cost relating to another group company, the payment alone does not make it an expense of the payer’s own business.

The general framework requires expenditure to be incurred wholly and exclusively for the taxpayer’s business and not be capital in nature, subject to the specific rules. Private expenditure and costs relating to exempt income need a different assessment. Mixed-purpose costs require a supported allocation rather than an assumption that the company’s payment card settles the question.

Write a short purpose explanation for unusual or material items. “Consulting” says little; “review of the company’s customer-contract terms under engagement reference X” identifies a recognisable service. The purpose note should help a reviewer connect the expense to operations without having to recreate the purchase conversation.

Separate accounting treatment from immediate deductibility

Determine whether the item belongs as a period expense, an asset, a prepayment, a funding movement or another balance-sheet entry. These classifications affect the starting accounts before the tax review begins. A substantial equipment purchase should not become an immediate deduction merely because its invoice was paid in full during the year.

Capital expenditure and any related depreciation or amortisation need their own analysis under the applicable accounting and tax rules. Do not claim both the acquisition cost and the depreciation as if they were separate operating purchases. Equally, do not automatically reverse all accounting depreciation just because the asset’s purchase price was capital expenditure.

Keep an asset schedule with purchase reference, date, cost, accounting treatment, depreciation and relevant tax adjustments. If part of an asset’s cost includes an otherwise disallowed amount, flag the related treatment for review rather than assuming capitalisation removes the restriction.

Work through a mixed-purpose expense

Assume an illustrative company records AED 12,000 for a service used partly for its business and partly for a non-business purpose. The reviewer establishes a fair and reasonable allocation, supported by usage records, of 75% business and 25% non-business. Assume there is no other deduction restriction and the amount is correctly recorded for the period.

The business portion is AED 9,000 and the non-business portion AED 3,000. If the whole AED 12,000 reduced accounting profit, the working paper needs to reflect the disallowed AED 3,000 when determining taxable income. The 75% is an assumption for this example, not a standard allowance for similar-looking costs.

A good allocation record explains the evidence, why the method reflects the service’s actual use and whether circumstances changed. A percentage copied from a previous year is weak support if operations have materially changed. Where a particular part can be identified directly, preserve that identification instead of diluting everything into an arbitrary overall ratio.

Check categories with their own restrictions

Some costs need more than the general business-purpose explanation. Customer entertainment, interest, donations, statutory fines and payments involving owners or related parties have specific considerations. Identify the category before selecting a deduction percentage.

For example, client entertainment can be subject to a 50% restriction even where there is a commercial reason to incur it. A private family occasion is not made half deductible by putting it in the entertainment account. A payment described as an owner salary needs evidence of services and a market-value assessment, rather than relying on a payroll label; the owner-remuneration guide covers that review.

Distinguish a statutory fine from compensation paid under a commercial contract. The legal character of the payment matters. Do not apply a blanket “all penalties disallowed” rule to every amount with the word “penalty” in its accounting description, or assume a government fine becomes deductible because it arose while conducting business.

Keep corporate tax and VAT decisions separate

The accounting cost used in a corporate tax review should be consistent with the business’s VAT treatment. Recoverable input VAT is not a corporate tax expense deduction. VAT that is not recoverable may form part of a cost, with its corporate tax treatment following the relevant rules for that underlying item.

For an illustrative ordinary purchase, an invoice might show AED 10,000 net value plus AED 500 VAT. If the AED 500 is properly recoverable, do not also include it as an expense deduction alongside the AED 10,000. If recovery is unavailable, establish the correctly recorded cost and then review its corporate tax treatment; the absence of VAT recovery does not automatically make the whole gross amount deductible.

Use the input VAT recovery guide to assess the purchase-side VAT conditions. Retain a clear bridge between the invoice, VAT schedule, accounting amount and tax adjustment. This prevents two teams reviewing the same document from each assuming the other already resolved the tax question.

Build an expense review register

For each material or uncertain item, record the supplier, document, amount, accounting account, business purpose, category-specific rule, proposed deductible amount and reviewer. Include links to supporting schedules where a calculation is needed. A return preparer should be able to understand the final amount from that register.

Use statuses that distinguish a supported claim, a reviewed exclusion and an open question. A missing invoice should identify the document required and the person responsible for obtaining it. An uncertain technical treatment should identify the facts and source needed for the decision. Neither should disappear into an unexplained adjustment to the total.

Before approving the return, reconcile the register to the ledger and the accounts-to-tax working paper. Check for duplicated add-backs, signs entered backwards and calculations based on superseded balances. Retain the final accounts version, reviewed schedules and approval together.

The aim is not to build a folder containing every receipt without explanation. It is to establish a defensible deduction amount, make the exceptions visible and leave enough evidence for someone else to reproduce the conclusion after the preparer has moved on.

Sources checked on 26 October 2026. Numerical allocations and purchase scenarios are illustrative and depend on the stated assumptions.

Sources

• FTA's Determination of Taxable Income guide