Before a business is officially incorporated, there are certain expenditures incurred that are typically associated with the process of setting up a Business such as feasibility studies, registration fees, legal and professional fees in relation to incorporation documents, etc.
Unless otherwise specified, any such expenditure incurred wholly and exclusively for the Business that is not capital in nature would be allowed as a deduction in the Tax Period in which it is incurred. Where a Taxable Person adopts Accrual Basis of Accounting, “Incurred means the time at which it is required to be recorded in the Financial Statements based on IFRS or IFRS for SMEs.
Where a taxable person adopts Cash Basis of Accounting, the Pre-Incorporation expenses will be allowed in the First Tax Period to the extent recorded in the Income and Expenditure Statement.
Subject to meeting the general deduction criteria under the Corporate Tax Law and provided that it has not been claimed as deductible expenditure by another Taxable Person, pre-incorporation expenditure will be allowed as a deduction to the extent to which it is recorded in the income statement once the company is incorporated (or the Business is set up), in line with the relevant Accounting Standards.
Wholly and exclusively incurred expenditure, It is necessary to consider the purpose for incurring the expenditure to assess whether it can be deducted for Corporate Tax purposes. For it to be fully deductible, the expenditure needs to be incurred “wholly and exclusively” for Business purposes, which means that the full amount has been incurred solely for these purposes. If the expenditure is incurred for non-Business purposes, then it must be added back when calculating Taxable Income.
When a business is in its pre-launch phase—after incorporation but before revenue generation—it may incur various expenses related to setting up operations. These pre-trading expenditures include costs associated with product development, marketing, advertising, office setup, utilities, office equipment, and even hiring and training employees.
If pre-trading expenditure is recorded as an expense in the financial statements, it can be deducted for tax purposes. The deduction is allowed in the tax period when the expense is incurred, even if the business has not yet generated revenue during that period. The deduction criteria follow the general guidelines outlined in the Corporate Tax Law.
Example
The importance of a Taxable Person’s purpose when incurring expenditure If an individual operating through a sole establishment carries on a Business administering an online sales platform and such individual pays for dental work for themselves, then it is likely that such expenditure will not have been incurred for the purposes of the Business. Rather, it was incurred for their own private purposes and the expenses would not be deductible for Corporate Tax purposes. Furthermore, if a company that owns an online sales platform pays for the dental work of its owner who is not involved in the operation of the company, then such expenditure also will not have been incurred for the purposes of the Business. The expense was for the purpose of providing a personal benefit to an owner and as such the expenses would not be deductible for Corporate Tax purposes.
If expenditure is incurred partly for Business purposes and partly for some other purposes, the amount must be apportioned so that only the part relating to the derivation of Taxable Income will be allowed as a deduction. This includes any identifiable part or proportion of the expenditure incurred wholly and exclusively for Business purposes, as well as an amount that has been apportioned determined on a fair and reasonable basis.
What is fair and reasonable will depend on the circumstances and facts of each case. In many cases, there would be more than one method of apportioning expenses which is fair and reasonable to use. The fair and reasonable approach chosen should accurately reflect the underlying activity, should not be unnecessarily burdensome and complex for the Taxable Person to determine and justify, and for the FTA to understand and review.
Example on apportionment of non-business expenditure
Mr. A is a florist. He owns a delivery van which is primarily used for collecting supplies and making deliveries to customers. However, outside of regular business hours, Mr. A uses the van for personal errands, such as shopping and driving his children to school. Throughout the Tax Period, Mr. A recorded the mileage of his business and personal journeys.
The mileage records revealed that journeys made for a business purpose accounted for 60% of the use of the van, while the remaining 40% of use related to Mr. A’s personal use of the van. Mr. A’s Accounting Income for the Tax Period is AED 4,500,000. Vehicle expenses were calculated to be AED 120,000.
The vehicle expenses were not incurred wholly and exclusively for the purposes of Mr. A’s Business and a deduction can therefore be claimed on the vehicle expenses in full. However, as Mr. A can identify the proportion which relates to Business use (60% of journeys), AED 72,000 (60% of AED 120,000) can be claimed as an expense deduction. The remaining 40% (AED 48,000) cannot be deducted as an expense for Corporate Tax purposes.
To reflect that 40% of vehicle expenses are disallowed, when calculating his Taxable Income, Mr. A must add AED 48,000 back to his Accounting Income. Mr. A’s Taxable Income, assuming that no other adjustments need to be made, would thus be AED 4,548,000 (AED 4,500,000 + AED 48,000).
| Particulars | Business Purpose | Personal Purpose |
| According to Mileage Records, percentage used | 60% | 40% |
| Apportionment of Vehicle Expenses proportionately | 120,000*60%
=72,000 AED |
120000*40%
=48,000 AED |
| Deductible under UAE Corporate Tax? | Yes, this is a deductible expenditure. | No, this is not a deductible expenditure. |
| Aggregate of Vehicle Expenses | 120,000 AED | |
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