The UAE Corporate Tax (“CT”) law outlines provisions for the deductibility of certain expenditures, specifying the degree to which they can be deducted from businesses’ taxable income. According to Article 28 of the CT Law, any expense incurred wholly and exclusively for business purposes is allowed as a deductible expense.
To prevent abuse and fraudulent claims, it is essential to ensure that expenses are incurred reasonably and justifiably, avoiding personal or extravagant purposes.
Employment Related Expenditure
Employee costs are generally considered to be wholly and exclusively incurred for Business purposes provided that they are at Arm’s Length Price (Fair Market Value), where employees are Related Parties or Connected persons.
Whether an employee is paid wholly in cash or also receives other benefits, such as a car for personal use is not relevant. In this situation, the personal use should be viewed in the same way as the employee spending their cash salary on items for their personal benefit. The same applies to other benefits, such as medical insurance or a flight allowance (for spouse and children).In other words, the cost is wholly and exclusively for Business purposes as rewarding employees is wholly a Business purpose. The same principle applies in relation to costs incurred for entertainment of employees, for example, for team building at a seasonal function, or to reward performance.
This should be distinguished from entertainment expenditure incurred to entertain business partners or customers.
Entertainment for employees
Entertainment expenditure should be distinguished from expenditure incurred in relation to employees. Employment related expenditure will not fall under the ambit of entertainment expenditure and should be fully deductible, provided that it is incurred wholly and exclusively for the Taxable Person’s Business.
Based on the above, expenditure reported in the Financial Statements that is incurred for employee/staff entertainment, such as staff parties, off-site events/away-days or rewards for meeting performance targets, are employee related expenses as opposed to entertainment expenses and can be fully deducted for Corporate Tax purposes.
However, if an expense is incurred for an event which is private in nature, such as a wedding for family members who happen to also be staff, it will not be deductible for Corporate Tax purposes.
Where a Taxable Person organizes conferences and/or business events for employees, their spouses and children (such as team building events or seasonal events), for which it incurs expenditure on catering, this expenditure will be deductible since it relates to the Business of the Taxable Person and is not meant for the entertainment of non-employees, provided that the expenditure is not excessive.
According to General Corporate Tax Guide, Para6.5.4.2. Entertainment expenditure, it is common for costs to be incurred to entertain customers, shareholders, suppliers, or other business partners. However, this type of entertainment often contains a private element that would prevent the expenditure from being wholly and exclusively incurred for Business purposes.
As the private element can be difficult to estimate and apportion when looking at entertainment expenditure, a 50% deduction is allowed for Corporate Tax purposes in all cases of this type of expenditure.
Entertainment expenditure includes expenditure in connection with meals, accommodation, transportation, admission fees, as well as facilities and equipment used in connection with such entertainment.
Entertainment expenditure may include personal non-business expenditure, requiring the expenditure to be apportioned. Where the entertainment expenditure is not wholly and exclusively incurred for the purposes of the business, a Taxable Person will need to identify the appropriate proportion to be treated as entertainment expenditure and only 50% of that proportion will be deductible.
The deductibility limitation does not apply for expenditure incurred for staff entertainment. This means that, for example, the cost of internal entertainment such as staff parties can be fully deducted for Corporate Tax purposes unless the staff are family members and the event is private in nature (such as a wedding)
Examples
- A family-owned company owns a box at a football stadium, which is only used to entertain the company’s clients. There is a business purpose so the wholly and exclusively rule is satisfied. In this case, 50% of the cost would be treated as deductible as entertainment expenditure. The remaining 50% is not deductible. Conversely, if the box was used by the owner’s own family, the expenditure would be disallowed entirely as this would be personal consumption without a business purpose.
- R LLC is a manufacturer of IT equipment, which recently decided to expand its operations by opening a new factory. In order to celebrate the opening of the new factory and generate sales, R LLC entertained a number of customers at the new facility. R LLC’s Accounting Income for the Tax Period was AED 7,000,000, which included AED 300,000 in business entertainment expenditure. As only 50% of business entertainment expenditure is an allowable deduction for Corporate Tax purposes, AED 150,000 must be added back to R LLC’s Accounting Income when calculating its Taxable Income. Therefore, assuming there is no other adjustment which must be made, R LLC’s Taxable Income for the Tax Period is AED 7,150,000.
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