Capital Allowances and Depreciation

Introduction

Capital assets are essential to any business operation. From machinery and vehicles to buildings and IT systems, these assets contribute to long-term productivity and revenue generation. Under the UAE Corporate Tax regime, businesses must correctly account for the cost of these assets, not through traditional accounting depreciation, but via capital allowances.

At Sheikh Anwar Accounting and Auditing LLC, we guide businesses in applying the correct capital allowance treatment, ensuring full compliance with tax regulations and optimal tax planning.

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✅ What Are Capital Allowances?

Capital allowances refer to tax deductions granted over a number of years for capital expenditures incurred on tangible fixed assets used in the business. These allowances replace accounting depreciation for tax purposes.

Under Federal Decree-Law No. 47 of 2022, only capital allowances are permitted to reduce taxable income. This ensures uniformity and fairness in the tax system and prevents businesses from using varying accounting methods to manipulate tax outcomes.

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📚 Legal Foundation

The tax treatment of capital assets in the UAE is governed by:

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses

• Ministerial Decision No. 120 of 2023, which specifies the categories of assets and the allowable depreciation (capital allowance) rates

These laws provide a structured method to depreciate assets for tax purposes based on either a straight-line or reducing balance method, depending on the asset class.

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🧾 Why Are Capital Allowances Important?

Capital allowances serve multiple important purposes:

• 🔹 Ensure a fair and consistent deduction method for all taxpayers

• 🔹 Reflect the economic use of an asset over its useful life

• 🔹 Encourage business investment in fixed assets

• 🔹 Prevent tax manipulation through aggressive accounting depreciation policies

For every client at Sheikh Anwar Accounting and Auditing LLC, we help align accounting treatment with the UAE tax laws to avoid unnecessary penalties and optimize deductions.

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🏗️ Categories of Depreciable Assets and Tax Rates

The UAE Ministry of Finance has categorized capital assets and prescribed depreciation rates as follows:

Asset Category Capital Allowance Rate Method of Calculation Useful Notes

Buildings (not land) 10% Straight-Line Land is excluded from depreciation

Furniture and Fixtures 25% Reducing Balance Includes office desks, chairs, etc.

Computers and Software 33.33% Straight-Line Depreciated over 3 years

Motor Vehicles 25% Reducing Balance Includes cars, delivery vans, etc.

Plant and Machinery 15% Reducing Balance Factory equipment, industrial machines

Capital Leased Assets Based on useful life Straight-Line Treated similar to owned assets

🛑 Non-depreciable asset: Land, goodwill, and personal-use assets.

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🧮 Example: Comparing Capital Allowance with Accounting Depreciation

Let’s take a practical example:

Asset: Machinery purchased for AED 100,000

Accounting Depreciation: 20% straight-line → AED 20,000 per year

Capital Allowance (Tax Depreciation): 15% reducing balance

• Year 1: AED 15,000 (15% of 100,000)

• Year 2: AED 12,750 (15% of 85,000)

• Year 3: AED 10,837.50 (15% of 72,250), and so on

💡 Conclusion: While accounting depreciation remains in your books, only the capital allowance is allowed for tax purposes. At Sheikh Anwar Accounting and Auditing LLC, we maintain separate fixed asset schedules for clients to ensure compliance with both accounting and tax rules.

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🔄 Transitional Rules for Pre-Existing Assets

For assets acquired before the introduction of UAE Corporate Tax (before 1 June 2023 for most businesses):

• The net book value as of the beginning of the first tax period will be considered as the opening balance.

• Remaining useful life must be reassessed in line with the capital allowance system.

• Any revaluation surpluses are ignored for tax purposes.

We assist our clients in converting accounting records into tax-compatible formats to ensure a smooth transition.

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🏷️ Treatment of Asset Disposals

If a capital asset is sold or disposed of:

• A balancing adjustment may be made (i.e., taxable profit or additional deduction)

• Any profit on disposal exceeding the tax written-down value may be taxed

• Proper documentation of purchase cost, depreciation claimed, and sale proceeds is essential

Our tax experts at Sheikh Anwar Accounting and Auditing LLC carefully manage this process to avoid unexpected tax consequences.

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🧩 Other Considerations

• Asset Improvements: If you upgrade an existing asset, the improvement cost should be capitalized and depreciated separately.

• Asset Pooling: UAE law does not permit pooling of assets—each asset must be tracked individually.

• Leasehold Assets: Treated similarly to owned assets for depreciation purposes if it qualifies as a capital lease.

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❌ Common Mistakes to Avoid

• Claiming accounting depreciation instead of capital allowance

• Not maintaining a fixed asset register

• Including non-business or personal-use assets in tax depreciation

• Applying incorrect rates or methods for different asset classes

We routinely review our clients’ fixed asset schedules to detect and correct these issues before tax filing.

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📌 Our Service Approach

At Sheikh Anwar Accounting and Auditing LLC, we:

✅ Classify assets as per MoF guidelines

✅ Apply the correct capital allowance methods

✅ Maintain separate schedules for accounting and tax

✅ Adjust for transitional assets and disposals

✅ Provide audit support and FTA inquiry assistance

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🎯 Final Thoughts

Capital allowances are not just a compliance formality—they are a vital part of corporate tax optimization. Failing to apply the correct treatment can result in overpayment of tax or exposure to penalties.

With a dedicated tax advisory team, Sheikh Anwar Accounting and Auditing LLC ensures that your capital assets are accurately managed for both compliance and tax efficiency. Let us handle your capital allowances and corporate tax filings with precision and professionalism.

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📞 Contact us today at

www.sa-auditors.com