Are expenses on exempt income deductible?

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.

Article 22 – Exempt Income The following income and related expenditure shall not be taken into account in determining the Taxable Income: 1. Dividends and other profit distributions received from a juridical person that is a Resident Person. 2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of this Decree-Law. 3. Any other income from a Participating Interest as specified in Article 23 of this Decree-Law. 4. Income of a Foreign Permanent Establishment that meets the condition of Article 24 of this Decree-Law. 5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this DecreeLaw.

7. Expenditure related to Exempt Income Expenditure related to Exempt Income cannot be taken into account in determining Taxable Income.112 In other words, such expenditure is non-deductible for Corporate Tax purposes, which is symmetrical with the non-taxability of the Exempt Income. Accordingly, expenditure (other than Interest expense113) incurred in relation to income which benefits from the Participation Exemption is not deductible. Related expenditure The use of the term “related expenditure” in Article 22 of the Corporate Tax Law indicates that the expense must be in connection with Exempt Income. There should be a clear and direct nexus or connection which can be established between the expense and the Exempt Income. Expenditure which is unrelated to Exempt Income or has a remote or indirect connection with Exempt Income is not subject to disallowance. In some instances, a Taxable Person incurs a common expense for more than one purpose, i.e. incurred for the purpose of earning both Exempt Income and non-Exempt (i.e. Taxable) Income. The tax treatment of such common expense will be as follows: • • • Any part or proportion of a common expense that can be clearly identified as being incurred wholly and exclusively to derive Taxable Income is deductible;114 Any part or proportion of a common expense that can be clearly identified as being incurred wholly and exclusively to derive Exempt Income is non-deductible; Any remaining unidentifiable balance of a common expense shall be apportioned between Taxable Income and Exempt Income on a fair and reasonable basis, having regard to the relevant facts and circumstances of the Taxable Person’s Business.115 Example 26: Common expense incurred towards Exempt Income and Taxable Income Mr A, as part of his Business, paid fees of AED 1,000 to a financial consultant for investment related consultancy. Mr A purchased shares of Company B (a company incorporated and resident in the UAE) for AED 8,000 and debentures of Company C (a company incorporated and managed outside the UAE) for AED 2,000. The 112 Article 22 and Article 28(2)(b) of the Corporate Tax Law. 113 Articles 29, 30 and 31 of the Corporate Tax Law. 114 Article 28(3)(a) of the Corporate Tax Law. 115 Article 28(3)(b) of the Corporate Tax Law. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 63

For example, purchasing a long-term asset like machinery would be a capital expense, but paying for routine maintenance to keep the machinery running would be a revenue expense. 4.2.3. Interest expenditure related to deriving Exempt Income The general rule is that expenditure associated with deriving Exempt Income is not deductible.46 However, there is an exception for Interest expenditure, which may still be deductible if it meets the criteria set by the General and Specific Interest Deduction Limitation Rules.47 This exception applies specifically to Interest expenditure incurred in deriving any Exempt Income from Dividends and other profit distributions received from a juridical person that is a Resident Person or from a Participating Interest in a foreign juridical person, other income from a Participating Interest, income of a Foreign Permanent Establishment, and income derived by a Non-Resident Person from operating aircraft or ships in international transportation.48 The tax deductibility of this Interest expenditure remains conditional upon the Interest expenditure meeting the criteria set by the General and Specific Interest Deduction Limitation Rules.49 For example, a company that borrows money to invest in a venture that generates Exempt Income from Dividends and other profit distributions would be entitled to deduct the Interest expenditure on those borrowings, subject to the General Interest Deduction Limitation Rule. Interest expenditure incurred in relation to the acquisition and subsequent holding of a Participating Interest (that can result in Exempt Income) is allowed as a deduction subject to the General and Specific Interest Deduction Limitation Rules.50 If the loan used to finance the acquisition and subsequent holding of a Participating Interest is from a Related Party, it may be subject to the Specific Interest Deduction Limitation Rule in certain circumstances that could lead to a full disallowance of the Interest expenditure51 (see Section 5). 46 Article 28(2)(b) of the Corporate Tax Law. 47 Article 29 of the Corporate Tax Law. 48 Article 28(2)(b) read with Article 22 of the Corporate Tax Law. 49 Article 29 of the Corporate Tax Law. 50 Article 11 of Ministerial Decision No. 302 of 2024 51 Articles 29 and 31(1)(d) of the Corporate Tax Law read with Article 11(3) of Ministerial Decision No. 302 of 2024. Corporate Tax Guide | Interest Deduction Limitation Rules | CTGIDL1 39