Disallowed Expenses Explained

With the implementation of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, businesses in the UAE are now required to compute their taxable income by deducting allowable expenses from gross income. However, not all expenses are deductible. Certain costs, known as disallowed expenses, are expressly prohibited from being claimed against taxable income.

Sheikh Anwar Accounting & Auditing LLC outlines which expenses are disallowed, the reasoning behind these exclusions, and the impact on Corporate Tax computations in the UAE.

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📜 Legal Framework

The disallowance of expenses is governed under:

• Article 28(2) of the Corporate Tax Law

• Articles 30–34 of the Law

• Ministerial Decision No. 114 of 2023 (provides supporting guidance)

These provisions clearly define which expenses cannot be deducted while calculating taxable income.

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❌ What Are Disallowed Expenses?

Disallowed expenses are costs that, even though incurred by a business, cannot be deducted when calculating corporate taxable income. This is because these expenses:

• Do not relate directly to business operations

• Are personal or capital in nature

• Violate public policy or legal standards

• Have already received other tax treatment (e.g. dividends)

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🚫 List of Key Disallowed Expenses

1. Fines and Penalties

• Traffic fines

• Regulatory or administrative penalties

• VAT fines

Reason: These are considered breaches of law, and the tax system does not incentivize non-compliance.

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2. Bribes and Illegal Payments

• Bribes to public officials

• Undocumented commissions

Reason: Such payments are contrary to public interest and UAE’s international anti-corruption obligations.

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3. Personal Expenses

• Director’s personal travel

• Family-related costs

• Non-business entertainment

Exception: If substantiated as business-related and properly documented, some costs may be partially deductible.

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4. Dividends Paid

• Distributions to shareholders (including profit shares)

Reason: Dividends are post-tax profit distributions and are not business expenses.

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5. Corporate Tax and Foreign Tax Paid

• UAE Corporate Tax paid

• Foreign taxes (unless covered under foreign tax credit provisions)

Note: Foreign tax credits are available in specific cases, but not outright deductions.

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6. Capital Expenditure (CapEx)

• Purchase of land, buildings, machinery

Treatment: These are not deductible immediately but can be depreciated over the useful life of the asset as per Article 30 (Depreciation rules).

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7. Donations and Gifts (Unless to Approved Entities)

• Donations made to unregistered or non-approved charitable bodies

Permitted: Only if made to public benefit entities approved by the MoF

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8. Entertainment Exceeding Allowable Limit

• Business meals, client events, staff parties

Only 50% of eligible entertainment expenses are deductible as per Article 32 of the law.

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9. Provisioning and Reserves (Unless Authorized)

• General provisions for doubtful debts, warranties, or contingent liabilities

Allowed: Only where expressly permitted by Ministerial Decisions (e.g., for regulated banks and insurers)

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10. Expenses Not Supported by Proper Documentation

• Cash purchases with no invoices

• Unsubstantiated travel or reimbursements

Rule of Thumb: “No evidence = No deduction”

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🧮 Example – Impact on Taxable Income

Particulars AED Amount

Gross Revenue 1,500,000

Allowable Business Expenses (900,000)

Disallowed Expenses (Fines) 20,000

Disallowed Entertainment (50%) 15,000

Taxable Income = 1,500,000 – (900,000 – 15,000 + 20,000) = AED 635,000

Corporate Tax (9%) = AED 57,150

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📌 Summary Table of Disallowed Expenses

Expense Category Deductible? Notes

Fines and Penalties ❌ No Not allowed

Personal or Non-Business Expenses ❌ No Unless substantiated

Dividends and Profit Distributions ❌ No Post-tax distributions

Corporate Tax Paid ❌ No Not deductible

Bribes or Illegal Payments ❌ No Strictly prohibited

Entertainment (exceeding 50%) ❌ No Partial deduction allowed

Donations to Unregistered Charities ❌ No Must be approved entities

Capital Expenditure ❌ No (Direct) Allowed via depreciation

Unsupported Expenses ❌ No Documentation required

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🧠 Expert Guidance from Sheikh Anwar Accounting & Auditing LLC

Incorrectly claiming disallowed expenses can trigger:

• FTA audits

• Penalties for incorrect return filing

• Loss of Qualifying Free Zone Person status (if applicable)

• Reputational risks

We assist businesses in:

✅ Reviewing their trial balance for non-compliant expense claims

✅ Preparing books in line with tax regulations

✅ Preparing and filing accurate corporate tax returns

✅ Assisting with depreciation schedules and provisions

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📞 Contact Us Today

Avoid costly mistakes — ensure your expenses are compliant.

📍 Sheikh Anwar Accounting & Auditing LLC

🌐 www.sa-auditors.com

📧 info@sa-auditors.com

📞 +971-XX-XXX-XXXX