Are payments to overseas consultants 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.

Dividend income from Company B is exempt but the Interest income from the debenture is taxable. Based on the proportionate cost of the investments: • • 20% of the consultant’s fees are deductible: AED 2,000 / (AED 8,000 + AED 2,000); and 80% of the consultant’s fees are non-deductible: AED 8,000 / (AED 8,000 + AED 2,000). Expenditure in relation to a Participating Interest 7.2.1. Expenditure in relation to acquisition and disposal of a Participating Interest Expenditure incurred in relation to the acquisition, sale, transfer, or disposal of an entire Participating Interest, or part of a Participating Interest, is not tax deductible (with the exception of Interest expense).116 Instead, such costs should be capitalised as part of the cost of the Participating Interest. 117 Capitalisation of the expense is required for Corporate Tax purposes regardless of whether such expenses are capitalised in the Financial Statements. Examples of relevant expenses include, but are not limited to, professional fees, due diligence costs, litigation costs, commissions and brokerage fees, stamp duty, registration duties and other irrecoverable taxes, appraisal and valuation costs, and refinancing costs.118 7.2.2. Expenditure in relation to a failed acquisition of a Participating Interest Sometimes expenses are incurred with the intention of acquiring a Participating Interest but ultimately the acquisition is not completed. In such a case, since the Participating Interest is not acquired, the expense cannot be said to relate to a Participating Interest. Where the expense is incurred wholly and exclusively for the purposes of a Taxable Person’s Business, the expense may be deductible.119 Example 27: Expenditure in relation to a failed acquisition of shares Company A (a company incorporated and resident in the UAE) wants to invest in shares of Company F (a company incorporated and managed outside the UAE) as 116 Article 10(1) and Article 10(3) of Ministerial Decision No. 116 of 2023. 117 Article 10(4) of Ministerial Decision No. 116 of 2023. 118 Article 10(2) of Ministerial Decision No. 116 of 2023. 119 Article 28(1) of the Corporate Tax Law. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 64

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