Are recoverable VAT amounts deductible for Corporate Tax?

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 Amounts withdrawn from the Business by a natural person who is a Taxable Person under paragraph (c) of Clause 3 of Article 11 of this Decree-Law or a partner in an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

4.5.8.1. Bad debts, write-off and recovery A bad debt is a receivable that is determined to be uncollectable. This may result in a provision, but it can also lead to a Business writing off the receivable, i.e. no longer recognising it. In either case, there would normally be an expense in the income statement. If a balance is written off as a bad debt and this is in accordance with the relevant Accounting Standards (i.e. IFRS or IFRS for SMEs), the bad debt expense will be deductible when determining Taxable Income, as long as it satisfies the requirements for deductibility of expenditure in the Corporate Tax Law. Further, if a balance which was written off in a prior Tax Period is subsequently recovered, the credit to the income statement will be taxable in the Tax Period in which it is recognised in accordance with the requirements of IFRS or IFRS for SMEs, as applicable. Refer to Section 5 (Case Study 1) for the treatment of provisions when determining Taxable Income. 4.5.9. Non-deductible expenses Aside from the circumstances discussed above, deductions are also specifically disallowed for: • a donation, grant or gift made to an organisation that is not a Qualifying Public Benefit Entity (see Section 5, i.e. Case Study 1 for details).47 Any amounts paid by Taxable Persons in relation to Zakat will only be deductible if it is paid to a Qualifying Public Benefit Entity, • any fines and penalties, other than amounts awarded as compensation for damages or breach of contract (see Section 5, i.e. Case Study 1 for details),48 • bribes or other illicit payments (see Section 5 , i.e. Case Study 1 for details),49 • Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person (see Section 5, i.e. Case Study 1 for details),50 • amounts withdrawn from the Business by a natural person who is a Taxable Person or a partner in an Unincorporated Partnership,51 • Corporate Tax,52 • recoverable input Value Added Tax (see Section 5, i.e. Case Study 1 for details),53 47 Article 33(1) of the Corporate Tax Law. 48 Article 33(2) of the Corporate Tax Law. 49 Article 33(3) of the Corporate Tax Law. 50 Article 33(4) of the Corporate Tax Law. 51 Article 33(5) of the Corporate Tax Law. 52 Article 33(6) of the Corporate Tax Law. 53 Article 33(7) of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 33

Article 54 - Recoverable Input Tax 1. The Input Tax that is recoverable by a Taxable Person for any Tax Period is the total of Input Tax paid for Goods and Services which are used or intended to be used for making any of the following: a. Taxable Supplies. b. Supplies that are made outside the State which would have been Taxable Supplies had they been made in the State. c. Supplies specified in the Executive Regulation of this Decree-Law that are made outside the State, which would have been treated as exempt had they been made inside the State. 2. Where Goods are imported by a Taxable Person through another Implementing State and the intended final destination of those Goods was the State at the time of Import, then the Taxable Person shall be entitled to treat the Tax paid in respect of Import of Goods into the Implementing State as Recoverable Tax subject to the conditions specified the Executive Regulation of this Decree-Law. 3. Where Goods were acquired by a Taxable Person in another Implementing State and then moved into the State, the Taxable Person shall be entitled to treat the Tax paid in respect of the Goods in the Implementing State as Recoverable Tax subject to the conditions specified in the Executive Regulation of this Decree-Law. 4. A Taxable Person shall not be entitled to recover any Input Tax in respect of Tax paid in accordance with Clause 2 of Article 48 of this Decree-Law. 5. The Executive Regulation of this Decree-Law shall specify the instances where Input Tax is excepted from being recovered. Article 54 (bis)22 1. The Authority shall reject the deduction of the Recoverable Input Tax if it is established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person was aware of this relation upon deducting the Recoverable Input Tax. 2. The Authority may reject the deduction of the Recoverable Input Tax if it is 22 Article added as per Federal Decree-Law No. 16 of 2025. Federal Decree-Law No. 8 of 2017 and its amendments – As published by the Ministry of Finance 26 established to the Authority that the supply subject to the deduction was part of a supply or a chain of supplies related to Tax Evasion, and the Taxable Person should, based on circumstances of the supply, have been aware of this relation. 3. For the purposes of applying the provisions of Clause 2 of this Article, the Taxable Person shall be considered to have been required to be aware that the supply was part of a supply or a chain of supplies related to Tax Evasion, if he did not verify the validity and integrity of the supplies he receives before deduction of Input Tax, in accordance with the measures, procedures and conditions determined by the Authority in this regard.

Article 55 – Apportionment of Input Tax 30 1. Where there are quarterly Tax Periods, the Tax year shall be as follows: a. Where a Taxable Person’s Tax Period ends on 31 January and quarterly thereafter, the Taxable Person’s Tax year shall end on 31 January of every year. 30 Article amended as per Cabinet Decision No. 100 of 2024. Cabinet Decision No. 52 of 2017 and its amendments – Unofficial translation 43 b. Where a Taxable Person’s Tax Period ends on last day of February and quarterly thereafter, the Taxable Person’s Tax year shall end on the last day of February of every year. c. Where a Taxable Person’s Tax Period ends on 31 March and quarterly thereafter, the Taxable Person’s Tax year shall end on 31 March of every year. 2. Where the Tax Period is 12 (twelve) months, the Tax year shall be the same as the Tax Period. 3. Where the Tax Period is one month, the Tax year shall be the total Tax Periods in the year ending on last day of the calendar year. 4. As an exception to Clauses 1, 2 and 3 of this Article, the Tax year shall end in the following cases: a. where a Taxable Person applies for Tax deregistration, the Tax year shall end on the last day such Person was a Taxable Person, b. where a member joins a Tax Group, the Tax year shall end on the last day before joining the Tax Group, or c. where a member leaves a Tax Group, the Tax year shall end on the last day such Person was a member of the Tax Group. 5. In any other case where Clauses 1, 2, 3 and 4 of this Article do not apply, the Authority shall specify the Tax year. 6. To determine the Input Tax that could be recoverable, the Taxable Person shall apportion Input Tax as follows: a. Input Tax on supplies that wholly relate to supplies as specified in Clause 1 of Article 54 and Article 57 of the Decree-Law made by the Taxable Person may be recoverable in full. b. Input Tax that is not recoverable in accordance with Article 53 of this Decision or that does not relate to supplies specified in Clause 1 of Article 54 and Article 57 of the Decree-Law made by the Taxable Person may not be recoverable unless the provisions of the Decree-Law and this Decision provide otherwise. c. Input Tax that partly relates to supplies as specified in Clause 1 of Article 54 and Article 57 of the Decree-Law and partly not, shall be calculated in accordance with Clause 7 of this Article, and only the part that relates to supplies specified in Clause 1 of Article 54 and Article 57 of the Decree-Law may be recoverable. 7. The Input Tax that could be recoverable shall be calculated as follows: a. The Taxable Person shall calculate the percentage of Recoverable Tax with reference to Clause 1 of Article 54 and Article 57 of the Decree-Law, to the sum of Input Tax for the Tax Period. Cabinet Decision No. 52 of 2017 and its amendments – Unofficial translation 44 b. The percentage calculated under paragraph (a) of this Clause shall be rounded to the nearest whole number. c. The percentage calculated under paragraph (b) of this Clause shall be multiplied by the amount of Input Tax referred to in paragraph (c) of Clause 6 of this Article to establish the recoverable portion of that Input Tax. 8. The calculations referred to above shall be undertaken in respect of each Tax Period where Input Tax incurred relates to making Exempt Supplies or to activities that are not in the course of Business. 9. At the end of each Tax year the Taxable Person shall undertake the calculation mentioned in Clause 7 of this Article, but in respect of the entire Tax year just ended in the first Tax Period of its subsequent Tax year. 10. The Input Tax properly recoverable for the Tax year just ended as described in Clause 9 of this Article shall be compared to the Input Tax amount actually recovered in all the Tax Periods making up the Tax year, and an adjustment to the Recoverable Tax shall be made in the Tax Period mentioned in Clause 9 of this Article. 11. If the difference in any Tax year between the Recoverable Tax as calculated under this Article and the Recoverable Tax which would arise if a calculation was made which reflects the actual use of the Goods and Services to which the Input Tax relates, exceeds AED 250,000 (two hundred fifty thousand dirhams), the Taxable Person shall, in the Tax Period referred to in Clause 9 of this Article, make an adjustment to the Input Tax in respect of the difference. 12. For purposes of Clauses 4 and 11 of this Article, where a Tax year is less than 12 (twelve) months, the amount mentioned in Clause 11 of this Article must be adjusted to an amount proportionate to the length of such Tax Period. 13. Where the application of the calculations mentioned in this Article would give a result which the Taxable Person considers would not reflect the actual extent to which the Input Tax relates to making Taxable Supplies, he may apply to the Authority to authorise the use of an alternative basis of calculation based on the list of accepted mechanisms determined by the Authority. The Authority may oblige the Taxable Person to submit such application. 14. The Authority may approve that the Taxable Person may use an alternative mechanism of apportionment of Input Tax than that referred to in this Article from such future date as per any conditions determined by the Authority. 15. The Taxable Person may only apply to change the alternative mechanism after at least two Tax years from the approval to use such mechanism. Cabinet Decision No. 52 of 2017 and its amendments – Unofficial translation 45 16. Without prejudice to Clauses 9, 10 and 11 of this Article, the Taxable Person may apply to the Authority to approve the use of a specified recovery percentage to calculate the recoverable Input Tax in any Tax Period based on the recovery percentage of the preceding Tax year. 17. The Authority may request such information from the Taxable Person as it believes necessary to make a decision regarding application made under Clause 13 or 16 of this Article. 18. If the Authority accepts the application made under Clause 13 or 16 of this Article, it shall issue a Notification to the Taxable Person setting out the alternative calculation method and conditions for using of such method.

are directly attributable to activities of the business that give rise to VAT recovery and expenses that are attributable to activities which do not allow for VAT recovery. Example 12 A law firm only provides services which are subject to VAT. The firm purchases new office desks for their employees. Since the desks will be used by the law firm for the purpose of conducting their taxable activities, the law firm will be able to recover the VAT incurred on the purchase of the desks. In certain circumstances, goods or services will be used partly in the course of making supplies that allow for the recovery of input tax and partly for making supplies for which VAT is not recoverable. Where an expense is used for making such mixed supplies, the taxable person must determine the portion of the input tax that can be recovered. 10.4. Input tax apportionment Input tax which is incurred in respect of goods or services which are used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “residual” or “overhead” input tax. This residual input tax must be apportioned between those activities. Recovery will be restricted to the proportion relating to supplies that allow for VAT recovery. In order to determine the proportion of recoverable residual input tax, a calculation must be performed to determine the extent to which purchases are used to make recoverable supplies. The percentage resulting from the calculation is then applied to the residual input tax to determine the actual amount of the input tax that can be recovered. 10.4.1. Input tax apportionment calculation In order to determine the value of input tax which is recoverable by the business, the taxable person should use the following default calculation: 1. Calculate the total value of input tax which is directly attributable only to supplies for which VAT may be recovered. 2. Calculate the total value of input tax which is directly attributable only to supplies for which VAT cannot be recovered. 3. Calculate the percentage to be applied to the residual input tax by dividing the total value of input tax identified under Step 1 by the sum of the input tax identified under Step 1 and Step 2. The percentage should be rounded to the nearest whole number. 36 VAT Guide | Taxable Person | VATG001