Corporate Tax Deductions UAE: What Counts as Taxable Income

UAE corporate tax deductions start from accounting income, not a list of allowable costs. Article 20 of Federal Decree-Law No. 47 of 2022 takes the profit in your standalone financial statements and adjusts it. Article 28 deducts what was incurred wholly and exclusively for the business; Articles 30, 31, 32 and 33 restrict or block the rest.

The single most common misunderstanding about corporate tax deductions in the UAE is that there is a master list of allowable expenses somewhere, and the job is to tick off which of your costs appear on it. There isn’t.

Your deductions are, for the most part, whatever you have already expensed in the accounts, minus the specific items the law says you must add back, and minus the income the law says is exempt. Get comfortable with that mental model and most of the confusion falls away. Miss it, and you end up either over-claiming costs that should have been disallowed, or leaving exempt income in the tax base and paying tax you never owed.

Taxable income starts with accounting profit, not a blank page

Article 20(1) of Federal Decree-Law No. 47 of 2022 determines the taxable income of each taxable person separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE.

Article 20(2) then lists exactly what gets adjusted. Every row below was read against the English text of Federal Decree-Law No. 47 of 2022 as published by the UAE Ministry of Finance, on 4 August 2026.

Art 20(2)	Adjustment to accounting income
(a)	Unrealised gains or losses under Article 20(3)
(b)	Exempt income as specified in Chapter Seven
(c)	Reliefs as specified in Chapter Eight
(d)	Deductions as specified in Chapter Nine
(e)	Transactions with related parties and connected persons under Chapter Ten
(f)	Tax loss relief under Chapter Eleven
(g)	Incentives or special reliefs for a qualifying business activity set by Cabinet decision
(h)	Income or expenditure not otherwise taken into account, as specified by Cabinet decision
(i)	Any other adjustments specified by the Minister

Article 20(7) settles the hierarchy: in the case of any conflict between the Decree-Law and the applicable accounting standards, the Decree-Law prevails to that extent.

This is why clean accounting and bookkeeping is the foundation of a defensible tax return. If the accounting profit is wrong, every adjustment sits on a broken base. If the ledger does not separate entertainment, fines or personal costs into their own accounts, the year-end add-back becomes an archaeology exercise instead of a one-line calculation.

9%

UAE corporate tax rate on taxable income above the AED 375,000 threshold set by Cabinet Decision No. 116 of 2022 — applied only after all statutory add-backs, exemptions and reliefs

The wholly and exclusively test

Article 28(1) is short and unforgiving. Expenditure incurred wholly and exclusively for the purposes of the taxable person’s business, and that is not capital in nature, is deductible in the tax period in which it is incurred.

Article 28(2) then blocks four things by name.

Art 28(2)	No deduction is allowed for
(a)	Expenditure not incurred for the purposes of the taxable person’s business
(b)	Expenditure incurred in deriving exempt income
(c)	Losses not connected with or arising out of the business
(d)	Any other expenditure specified by Cabinet decision

Article 28(3) handles the mixed case, and it is more workable than businesses expect. Where expenditure is incurred for more than one purpose, a deduction is allowed for any identifiable part or proportion incurred wholly and exclusively for deriving taxable income, plus an appropriate proportion of any unidentifiable part, determined on a fair and reasonable basis having regard to the relevant facts and circumstances of the business.

The burden of making that split defensible sits with the taxpayer. A documented apportionment policy, applied consistently, survives a review. A round-number guess made in month twelve does not.

Entertainment: the 50% rule

Article 32(1) allows a taxable person to deduct 50% of any entertainment, amusement or recreation expenditure incurred during a tax period. Article 32(2) then defines the scope: expenditure incurred for the purposes of receiving and entertaining the taxable person’s customers, shareholders, suppliers or other business partners.

Art 32(2)	Included expenditure
(a)	Meals
(b)	Accommodation
(c)	Transportation
(d)	Admission fees
(e)	Facilities and equipment used in connection with the entertainment, amusement or recreation
(f)	Such other expenditure as specified by the Minister

The rationale is administrative rather than moral. Entertainment usually carries some private benefit that is hard to strip out cost by cost, so the law applies a flat disallowance instead of arguing each receipt. The practical instruction follows: give entertainment its own ledger account from the first month of the tax period.

Interest: the 30% cap and the AED 12,000,000 de minimis

Article 29 confirms that interest expenditure is deductible in the tax period in which it is incurred, subject to Articles 28, 30 and 31. Article 30 then caps it.

Provision	Rule
FDL 47/2022 Art 30(1)	Net interest expenditure is deductible up to 30% of accounting EBITDA for the period, excluding exempt income under Article 22
FDL 47/2022 Art 30(2)	Net interest expenditure is interest incurred, including amounts carried forward, less taxable interest income
FDL 47/2022 Art 30(3)	The cap does not apply where net interest expenditure does not exceed the amount the Minister specifies
MD 126/2023	That de minimis amount is AED 12,000,000
MD 126/2023	A taxable person may deduct the higher of AED 12,000,000 and the 30% EBITDA figure
FDL 47/2022 Art 30(4)	Disallowed net interest may be carried forward and deducted in the subsequent 10 tax periods, oldest first
FDL 47/2022 Art 30(6)	The rule does not apply to a bank, an insurance provider, a natural person conducting business in the UAE, or others the Minister determines

Article 31 adds a separate and narrower block. Article 31(1) disallows interest on a loan obtained directly or indirectly from a related party in respect of a dividend or profit distribution to a related party, a redemption or return of share capital to a related party, a capital contribution to a related party, or the acquisition of an ownership interest in a person who is or becomes a related party.

Article 31(2) provides the escape: the block does not apply where the taxable person can demonstrate that the main purpose of obtaining the loan and carrying out the transaction was not to gain a corporate tax advantage. Article 31(3) deems no advantage to arise where the related party is subject to tax on the interest at a rate of not less than 9%.

What is never deductible

Article 33 is a closed list and it does not bend to commercial logic.

Art 33	No deduction is allowed for
1	Donations, grants or gifts to an entity that is not a qualifying public benefit entity
2	Fines and penalties, other than amounts awarded as compensation for damages or breach of contract
3	Bribes or other illicit payments
4	Dividends, profit distributions or similar benefits paid to an owner of the taxable person
5	Amounts withdrawn from the business by a natural person taxable person or a partner in an unincorporated partnership
6	Corporate tax imposed under the Decree-Law itself
7	Recoverable input VAT under Federal Decree-Law No. 8 of 2017
8	Foreign income tax imposed outside the UAE
9	Any other expenditure specified by Cabinet decision

Item 7 deserves emphasis because it is where VAT and corporate tax touch. Input VAT that is recoverable is not a cost, so it is never a deduction. Input VAT that is genuinely blocked under Article 53 of the VAT Executive Regulation — entertainment for non-employees, motor vehicles available for private use — is a real cost and follows the ordinary Article 28 test instead.

The word “recoverable” also has a longer tail than most computations allow for. Where a business holds a building or major asset, the capital assets scheme in UAE VAT adjusts the recovered input tax for ten or five years under Article 58 of the VAT Executive Regulation. A downward adjustment in year four turns previously recoverable VAT into a real cost, and an upward one does the reverse — both of which move the Article 33(7) position for that period.

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Article 33 is a list of nine things. Most UAE tax computations we review have never touched more than two of them. The gap is almost never a dispute about the law — it is that nobody built a ledger account where the disallowed item could be seen.

Exempt income comes out of the base entirely

Article 22 removes five categories of income, and the related expenditure, from the determination of taxable income.

Art 22	Exempt income
1	Dividends and other profit distributions received from a juridical person that is a resident person
2	Dividends and profit distributions from a participating interest in a foreign juridical person under Article 23
3	Any other income from a participating interest under Article 23
4	Income of a foreign permanent establishment meeting Article 24
5	Income of a non-resident from operating aircraft or ships in international transportation under Article 25

Article 23(2) then defines a participating interest as a 5% or greater ownership interest in the shares or capital of a juridical person, where all four conditions are met.

Art 23(2)	Condition
(a)	Held, or intended to be held, for an uninterrupted period of at least 12 months
(b)	The participation is subject to corporate tax or a similar tax at a rate not less than 9%
(c)	The interest entitles the holder to at least 5% of distributable profits and 5% of liquidation proceeds
(d)	Not more than 50% of the participation’s direct and indirect assets are interests that would not themselves qualify
(e)	Any other conditions prescribed by the Minister

Article 23(3) deems the subject-to-tax condition met where the participation’s principal objective is holding qualifying shares and its income substantially consists of income from participating interests. Article 23(4) deems it met for a participation in a qualifying free zone person or an exempt person under UAE corporate tax, subject to conditions the Minister prescribes.

Article 23(5) then lists what actually falls out of the tax base once the conditions hold: foreign dividends, gains and losses on transfer or disposal of a participating interest after the 12-month period, and foreign exchange gains or losses in relation to it.

A worked computation in AED

Harrow Trading LLC, a Dubai mainland company with a 31 December year end, reports accounting income of AED 8,600,000 for 2025 under IFRS. Its tax computation runs as follows.

Line	Source	Amount (AED)
Accounting income per IFRS statements	Art 20(1)	8,600,000
Add back: entertainment disallowed (50% of AED 640,000)	Art 32(1)	+320,000
Add back: traffic and regulatory fines	Art 33(2)	+47,000
Add back: owner’s personal travel coded to the business	Art 28(2)(a)	+118,000
Add back: corporate tax charge recognised in the accounts	Art 33(6)	+215,000
Add back: recoverable input VAT expensed in error	Art 33(7)	+36,000
Deduct: dividend from a UAE resident subsidiary	Art 22(1)	−1,250,000
Add back: advisory fees incurred in deriving that exempt dividend	Art 28(2)(b)	+85,000
Taxable income		8,171,000

Net interest expenditure for the period is AED 4,100,000, comfortably below the AED 12,000,000 de minimis in Ministerial Decision No. 126 of 2023, so Article 30(3) disapplies the 30% cap and no interest adjustment arises.

The tax then follows Article 3(1) and Cabinet Decision No. 116 of 2022.

Step	Amount (AED)
Taxable income	8,171,000
Taxed at 0% (first AED 375,000)	375,000
Taxed at 9%	7,796,000
Corporate tax payable	701,640

Note what the add-backs cost. Had Harrow Trading LLC skipped all five of them, taxable income would have been AED 7,375,000 and the tax AED 630,000 — an understatement of AED 71,640. Under item 11 of Cabinet Decision No. 75 of 2023, failing to disclose that before an FTA audit notice would add a fixed 15% of the difference, AED 10,746, plus 1% per month.

Depreciation, capital costs and the realisation basis

Article 28(1) excludes expenditure that is capital in nature from immediate deduction, so capital spending reaches taxable income through the depreciation and amortisation recognised in the accounts rather than through a statutory allowance schedule.

Two elections interact with that. Article 20(3) lets a taxable person preparing accrual-basis statements elect to take gains and losses on a realisation basis, either for all assets and liabilities subject to fair value or impairment accounting, or for all assets and liabilities held on capital account at period end.

Where that election is in place, Ministerial Decision No. 173 of 2025, issued 23 June 2025 and effective for tax periods commencing on or after 1 January 2025, adds a second one.

MD 173/2025 Art 2(1)	Rule
Eligibility	A taxable person on the accrual basis that has elected the realisation basis under Article 20(3)
Nature of the election	Irrevocable
Asset covered	Investment property held at fair value under the applicable accounting standards
Deduction (a)	4% of original cost for each 12-month tax period, prorated for shorter or longer periods or part-year holdings
Deduction (b)	The tax written down value at the start of the relevant tax period
Amount allowed	The lower of (a) and (b)

“Original cost” takes the meaning of cost in IAS 40 and includes subsequent capitalised costs, subject to the arm’s length principle in Article 34. That last clause matters for group structures: a property transferred between related parties at an inflated value does not generate a bigger 4% deduction.

That 4% election is as close as the UAE comes to a statutory capital allowance, and it is worth understanding why there is nothing broader. We set out the full position, including the R&D tax credit that replaced the idea, in our guide to the investment tax allowance in the UAE.

Tax losses: how far a deduction travels

Where the adjustments produce a loss rather than a profit, Chapter Eleven decides what happens next.

Provision	Rule
Art 37(1)	A tax loss can be offset against taxable income of subsequent tax periods
Art 37(2)	The offset cannot exceed 75% of taxable income for that period before any loss relief
Art 37(3)	No relief for losses before corporate tax commenced, before the person became taxable, or from exempt assets or activities
Art 37(4)	Carried-forward losses must be used before any loss transferred under Article 38
Art 38(1)	Losses may be transferred between resident juridical persons at 75% common ownership, subject to seven further conditions
Art 39(1)(a)	Carry-forward requires continuous 50% ownership from the loss period to the period of use
Art 39(1)(b)	Or continuation of the same or a similar business after a change of more than 50%
Art 39(3)	Article 39(1) does not apply to a person whose shares are listed on a recognised stock exchange

The 75% ceiling in Article 37(2) is the one that surprises profitable businesses emerging from a loss-making period. A company with AED 4,000,000 of brought-forward losses and AED 3,000,000 of taxable income can shelter only AED 2,250,000 of it, leaving AED 750,000 in charge. Where a group is involved, the interaction with pre-grouping losses is set out in our guide to UAE corporate tax groups.

Small Business Relief switches the whole chapter off

Article 21(1) lets a resident taxable person elect to be treated as not having derived any taxable income for a tax period, where revenue does not exceed a threshold set by the Minister and other prescribed conditions are met.

Article 21(2) then disapplies five things: exempt income under Chapter Seven, reliefs under Chapter Eight, deductions under Chapter Nine, tax loss relief under Chapter Eleven, and Article 55 transfer pricing documentation.

MD 73/2023	Rule
Art 2(1)	Revenue threshold of AED 3,000,000 for each tax period
Art 2(2)	Applies to periods commencing on or after 1 June 2023, and only to periods ending on or before 31 December 2029, as amended by MD 131/2026
Art 2(3)	The election is unavailable once revenue in any relevant or previous period exceeded the threshold
Art 3	Not available to a constituent company of a multinational enterprises group, or to a qualifying free zone person
Art 4(1)	Losses in an elected period cannot be carried forward
Art 5(1)	Net interest expenditure in an elected period cannot be carried forward
Art 6(1)	Artificial separation of a business to stay under the threshold is a corporate tax advantage under Article 50(1)

Ministerial Decision No. 131 of 2026 extended Article 2(2) to tax periods ending on or before 31 December 2029. The relief still has a hard end date, so model the position without it for periods ending after that, and re-elect it each period until then rather than treating it as permanent.

Documentation is the deduction

Every adjustment above has to be evidenced, and the retention obligation is longer than the Tax Procedures default.

Obligation	Requirement	Source
Records supporting the return	Maintain for 7 years following the end of the tax period	FDL 47/2022 Art 56(1)
Records enabling taxable income to be ascertained	Same 7 years	FDL 47/2022 Art 56(1)(b)
Financial statements used to determine taxable income	Produce on FTA request, in the form and timeline prescribed	FDL 47/2022 Art 54(1)
Audited financial statements	Required where revenue exceeds AED 50,000,000 and the person is not a tax group	MD 84/2025 Art 2(1)(a)
Master file and local file	Maintain where the Minister’s conditions are met	FDL 47/2022 Art 55(2)
Transfer pricing documentation	Submit within 30 days of an FTA request	FDL 47/2022 Art 55(3)
Arm’s length supporting information	Provide within 30 days of an FTA request	FDL 47/2022 Art 55(4)

A cost that is genuinely wholly and exclusively for the business but has no invoice is a weak position in a review. Businesses that keep a tax working paper alongside the financial statements, cross-referenced to source documents, spend far less time defending their return than those rebuilding the logic under audit pressure.

How the pieces fit into one computation

Run the sequence in the same order every year and the return stops being an event.

Step	Action	Source
1	Start with accounting income from adequate standalone financial statements	FDL 47/2022 Art 20(1)
2	Apply any realisation-basis election, and the investment property depreciation election if made	Art 20(3); MD 173/2025 Art 2(1)
3	Add back Article 33 items — fines, bribes, owner distributions, corporate tax, recoverable input VAT, foreign income tax	Art 33
4	Add back 50% of entertainment	Art 32(1)
5	Add back costs failing the business-purpose test, including costs of deriving exempt income	Art 28(2)(a) and (b)
6	Deduct exempt income, with the participation conditions tested and documented	Arts 22 and 23
7	Run the interest limitation, checking the AED 12,000,000 de minimis first	Art 30; MD 126/2023
8	Test related-party loans against the specific block	Art 31
9	Apply arm’s length adjustments for related parties and connected persons	Art 34
10	Apply tax loss relief within the 75% ceiling	Art 37(2)
11	Apply the rate — 0% up to AED 375,000, 9% above	Art 3(1); CD 116/2022

Where the entity is a non-resident, the same computation applies only to the profit attributable to its UAE presence, which we set out in our guide to permanent establishment under UAE corporate tax.

Where this leaves your tax position

UAE corporate tax deductions are a reconciliation discipline, not a search for allowances. The law hands you a starting number in Article 20(1) and then tells you precisely what to do to it. The businesses that file cleanly are the ones whose chart of accounts already isolates entertainment, fines, owner costs and exempt income, so the year-end computation is a schedule rather than an investigation.

The businesses that struggle are not aggressive. They are usually just unprepared — no separate entertainment account, no working paper, no evidence file for the participation exemption, and no idea that Article 28(2)(b) also disallows the costs of earning exempt income. Fix the ledger structure once and the return fixes itself every year afterwards.

One last practical note for UAE SMEs. The corporate tax return is filed on EmaraTax within nine months of the tax period end under Article 53(1), and for a Dubai or Abu Dhabi company with a December year end that is 30 September. Build the add-back schedule in January while the audit file is open and the invoices are in front of you, not in September when the FTA deadline is a fortnight away and nobody remembers what the AED 640,000 hospitality line was for.

Velmont Crest is a DED-licensed UAE accounting firm providing advisory and preparation support on Corporate Tax computations, add-back schedules, exempt income documentation and FTA filings for SMEs across the mainland and free zones. Read more on our insights hub, see our corporate tax services, or get in touch via our contact page.

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Disclaimer: Velmont Crest is a DED-licensed accounting firm providing advisory, preparation and compliance support services. We are not a law firm, the Federal Tax Authority, or an FTA-registered tax agent representing clients before the FTA. UAE Corporate Tax rules on deductions and exempt income are set and updated by the Ministry of Finance and the Federal Tax Authority — verify your specific position against current legislation, Cabinet and Ministerial Decisions and FTA guidance, and take professional advice tailored to your circumstances before filing.

References

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses — UAE Ministry of Finance
• Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule — UAE Ministry of Finance
• Ministerial Decision No. 173 of 2025 on Depreciation Adjustments for Investment Properties Held at Fair Value — Federal Tax Authority
• Ministerial Decision No. 73 of 2023 on Small Business Relief — UAE Ministry of Finance
• Cabinet Decision No. 75 of 2023 and its amendments on Administrative Penalties — Federal Tax Authority
• The Official Portal of the UAE Government — Corporate Tax