Can I deduct expenses paid to a related party?

Article 36 – Payments to Connected Persons 1. Without prejudice to the provisions of Article 28 of this Decree-Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business. 2. For the purposes of this Decree-Law, a Person shall be considered a Connected Person of a Taxable Person if that Person is: a. An owner of the Taxable Person. b. A director or officer of the Taxable Person. c. A Related Party of any of the Persons referred to in paragraphs (a) and (b) of Clause 2 of this Article. 3. For the purposes of paragraph (a) of Clause 2 of this Article, an owner of the Taxable Person is any natural person who directly or indirectly owns an ownership interest in the Taxable Person or Controls such Taxable Person. 4. Where the Taxable Person is a partner in an Unincorporated Partnership, a Connected Person is any other partner in that same Unincorporated Partnership, and any Person that is a Related Party of that partner. 5. To determine that a payment or benefit provided by the Taxable Person corresponds with the Market Value of the service or otherwise provided by the Connected Person in exchange, the relevant provisions of Article 34 of this DecreeLaw shall apply as the context requires. 6. Clause 1 of this Article shall not apply to any of the following: Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 43 a. A Taxable Person whose shares are traded on a Recognised Stock Exchange. b. A Taxable Person that is subject to the regulatory oversight of a competent authority in the State. c. Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister. Chapter Eleven – Tax Loss Provisions

The fair and reasonable approach chosen should accurately reflect the underlying activity, should not be unnecessarily burdensome and complex for the Taxable Person to determine and justify, or for the FTA to understand and review. If the expenditure incurred for more than one purpose cannot be apportioned on a fair and reasonable basis, it will not be allowed as a deduction for Corporate Tax purposes. Refer to Section 5 (Case Study 1) for the treatment of expenditure incurred for more than one purposes while determining Taxable Income. 4.5.5. Non-arm’s length expenditure Payments or benefits provided by a Taxable Person to its Related Parties and/or Connected Persons would be deductible only to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Related Parties and/or Connected Person, and where the payment or benefit is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.42 For example, the salary or bonus paid to directors or officers of a company or an owner of the Taxable Person would be deductible when determining Taxable Income, but only insofar as this salary corresponds with the Market Value rates for such services rendered. In order to determine if the value of a service or benefit provided matches its Market Value, the arm’s length standard should be applied.43 4.5.6. Capital expenditure Capital expenditure is not deductible when determining Taxable Income. Capital expenditure is any expenditure that creates an enduring benefit to a Business. This is in contrast to revenue expenditure, which supports the day-to-day operations of the Business. 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. The question of whether expenditure is of a capital or revenue nature will depend on the particular facts and circumstances and will need to be determined on a case-by-case basis, in line with the Accounting Standards applied by the Taxable Person. In relation to capital expenditure, the following principles are laid out in Article 7 of Ministerial Decision No. 134 of 2023: • No deduction shall be allowed for depreciation, amortisation or other change related to capitalised expenditure, where such expenditure would not have been deductible had it been an expenditure that is not capital in nature. 42 Articles 34, 35 and 36 of the Corporate Tax Law. 43 Articles 34 and 36(5) of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 29