Are bribes or illegal payments deductible?

Article 33 – Non-deductible Expenditure No deduction is allowed for: 1. Donations, grants or gifts made 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 benefits of a similar nature paid to an owner of the Taxable Person. 5. Amounts withdrawn from the Business by a natural person who is a Taxable Person under paragraph (c) of Clause 3 of Article 11 of this Decree-Law or a partner in an Unincorporated Partnership. 6. Corporate Tax imposed on a Taxable Person under this Decree-Law. 7. Input Value Added Tax incurred by a Taxable Person that is recoverable under Federal Decree-Law No. (8) of 2017 referred to in the preamble and what replaces it. 8. Tax on income imposed on the Taxable Person outside the State. 9. Such other expenditure as specified in a decision issued by the Cabinet at the suggestion of the Minister. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 39 Chapter Ten – Transactions with Related Parties and Connected Persons

Thus, as noted in Section 4.5.9, payment of fines or penalties, other than compensation for damages or breach of contract, is not deductible expenditure.127 Company F has paid AED 20,000 relating to speeding fines levied on the company employees, which were incurred during the performance of the employees’ work. Given the nature of expenditure is a fine/penalty due to the infraction of law, it is nondeductible expenditure. • Compensation for damages or breach of contract: Generally, where the payment is intended to provide restitution for damages caused by virtue of normal/day-to-day Business operations, then it will be allowable as a deduction for Corporate Tax purposes, for example, compensation paid to a customer for breach of contract. Expenditure relating to breach of customer contract (AED 600,000), compensation paid to customers (AED 900,000) and professional fees for defending a lawsuit filed by a customer for legal claims (AED 400,000) pertains to the normal/day-to-day Business operations of Company F. These amounts (i.e. compensation and professional fees to defend lawsuits) are deductible for Corporate Tax purposes and so no adjustment is required when determining Taxable Income. 5.3.8 Bribes, illicit payments No deduction is allowed for bribes or other illicit payments even if the expenditure is recorded as a cost under accounting principles.128 In this example, the expenditure of AED 2,000,000 relates to inappropriately seeking to influence a customer’s employee to award a contract to Company F. Such a payment, even if wholly incurred for Business purposes, is in the nature of a bribe, and is non-deductible for Corporate Tax purposes i.e. added back when determining Taxable Income. 5.3.9 Payments to Connected Persons Payments to Connected Persons, which includes an owner or director, are only deductible to the extent they represent Market Value for the service or benefit provided.129 Company F entered into a lease agreement for office space with shareholder Mr A which is at Market Value. As long as this is purely for the Business of Company F and 127 Article 33(2) of the Corporate Tax Law. 128 Article 33(3) of the Corporate Tax Law. 129 Article 36(1) and (2) of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 58

Article 28 – Deductible Expenditure 1. Expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature shall be deductible in the Tax Period in which it is incurred, subject to the provisions of this Decree-Law. 2. For the purposes of calculating the Taxable Income for a Tax Period, no deduction is allowed for the following: 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 Taxable Person’s Business. d. Such other expenditure as may be specified in a decision issued by the Cabinet at the suggestion of the Minister. 3. If expenditure is incurred for more than one purpose, a deduction shall be allowed for: a. Any identifiable part or proportion of the expenditure incurred wholly and exclusively for the purposes of deriving Taxable Income. b. An appropriate proportion of any unidentifiable part or proportion of the Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 36 expenditure incurred for the purposes of deriving Taxable Income that has been determined on a fair and reasonable basis, having regard to the relevant facts and circumstances of the Taxable Person’s Business.