Are pre-incorporation expenses 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.

control system (an asset), with the intention to depreciate the amount over a 10year period (assumed life of the asset), the Corporate Tax treatment will differ from the accounting treatment. Based on Article 7 of Ministerial Decision No. 134, no depreciation deduction is allowed for an expense that, if not capitalised, would not be deductible (i.e. AED 50,000 in this case). Therefore, even though the fine is capitalised and included in the cost of the asset, the company will not be permitted to claim the annual depreciation of AED 5,000 (i.e. AED 50,000/10 years) as a deduction. The treatment of capital expenditure when determining Taxable Income is covered in Section 5 (Case Study 1) and Section 11 (Case Study 7a) for a Taxable Person following the Accrual Basis of Accounting and in Section 10 (Case Study 6) for a Taxable Person following the Cash Basis of Accounting. 4.5.7. Pre-incorporation or pre-trade expenses Certain expenditure may be incurred before the Business is officially incorporated (for example, in the case of a company), which are typically associated with the process of setting up a Business. Examples include feasibility studies, registration fees, legal and professional fees in relation to incorporation documents, etc. As a general rule, unless specified otherwise, any such expenditure incurred wholly and exclusively for the Business that is not capital in nature would be allowed as a deduction in the Tax Period in which it is incurred.44 “Incurred” means the time at which it is required to be recorded in the Financial Statements based on IFRS or IFRS for SMEs, where a Taxable Person uses the Accrual Basis of Accounting. Similarly, in the case of the Cash Basis of Accounting, the pre-incorporation expenses will be allowed in the first Tax Period to the extent recorded in the income and expenditure statement. Thus, pre-incorporation expenditure, (though incurred before the Business is officially incorporated or set-up), will be allowed as a deduction to the extent to which it is recorded in the income statement once the company is incorporated (or the Business is set up), in line with the relevant Accounting Standards, subject to meeting the general deduction criteria under the Corporate Tax Law45 and provided that it has not been claimed as deductible expenditure by another Taxable Person. 44 Article 28(1) of the Corporate Tax Law. 45 Chapter Nine of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 31

Article 7 – Other Adjustments on Deductions 1. For the purposes of paragraph (i) of Clause 2 of Article 20 of the Corporate Tax Law, to the extent that any expenditure is determined as deductible under Chapter Nine of the Corporate Tax Law where certain conditions are met, any expenditure that does not meet these conditions shall not be deductible. 2. For the purposes of paragraph (i) of Clause 2 of Article 20 of the Corporate Tax Law, no deduction shall be allowed for depreciation, amortisation or other change related to capitalised expenditure, where such an expenditure would not have been deductible had it been an expenditure that is not capital in nature. 3. For the purposes of paragraph (i) of Clause 2 of Article 20 of the Corporate Tax Law, expenditures that are capital in nature that have not been deducted for the purpose of calculating the Taxable Income, other than those under Clause 2 of this Article, shall be deductible in the calculation of gains or losses upon the realisation of the asset or liability. 4. For the purposes of this Article, expenditures that are capital in nature shall be those treated as such under the Accounting Standards applied by the Taxable Person.