How much of client entertainment expenditure is deductible for Corporate Tax?

Article 32 – Entertainment Expenditure 1. Subject to Article 28 of this Decree-Law, a Taxable Person shall be allowed to deduct 50% (fifty percent) of any entertainment, amusement, or recreation expenditure incurred during a Tax Period. 2. Clause 1 of this Article applies to any expenditure incurred for the purposes of Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 38 receiving and entertaining the Taxable Person’s customers, shareholders, suppliers or other business partners, including, but not limited to, expenditure in connection with any of the following: a. Meals. b. Accommodation. c. Transportation. d. Admission fees. e. Facilities and equipment used in connection with such entertainment, amusement or recreation. f. Such other expenditure as specified by the Minister.

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.

same interest capping rules. For further details on the General Interest Deduction Limitation Rule, readers are advised to consult Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule. Entertainment expenditure It is common for costs to be incurred to entertain customers, shareholders, suppliers, or other business partners. However, this type of entertainment often contains a private element that would prevent the expenditure from being wholly and exclusively incurred for Business purposes. As the private element can be difficult to estimate and apportion when looking at entertainment expenditure, a 50% deduction is allowed for Corporate Tax purposes in all cases of this type of expenditure.189 Entertainment expenditure includes expenditure in connection with meals, accommodation, transportation, admission fees, as well as facilities and equipment used in connection with such entertainment.190 Entertainment expenditure may include personal non-business expenditure, requiring the expenditure to be apportioned. Where the entertainment expenditure is not wholly and exclusively incurred for the purposes of the business, a Taxable Person will need to identify the appropriate proportion to be treated as entertainment expenditure and only 50% of that proportion will be deductible. Example 19: Entertainment expenditure A family owned company owns a box at a football stadium, which is only used to entertain the company’s clients. There is a business purpose so the wholly and exclusively rule is satisfied. In this case, 50% of the cost would be treated as deductible as entertainment expenditure. The remaining 50% is not deductible. Conversely, if the box was used by the owner’s (the shareholder’s) own family, the expenditure would be disallowed entirely as this would be personal consumption without a business purpose. 189 Article 32(1) of the Corporate Tax Law. 190 Article 32(2) of the Corporate Tax Law. General Corporate Tax Guide | Corporate Tax | CTGGCT1 70

entertainment expenditure. However, where benefits are provided to clients and business partners that are not considered commercial hospitality or promotions, then such expenditure incurred would be considered as entertainment expenditure and would be subject to the 50% restriction (e.g. providing business partners with complimentary stays at hotels). 4.5.10.4. Marketing or advertising expenditure The 50% deduction rule does not apply to other marketing expenditure, such as advertising, online promotion, attending trade shows or direct marketing campaigns, which is deductible in line with the general principles of the Corporate Tax Law, subject to being wholly and exclusively incurred for Business purposes. Whether an item of expenditure can be considered as marketing expenditure or entertainment expenditure, will largely depend on the industry in which the Taxable Person operates. Where marketing involves expenditure on the promotion of a Taxable Person’s goods or services, for example, demonstrating a car at a racetrack, the necessary costs of doing so will not be subject to the 50% restriction. However, (typically discretionary) costs of providing hospitality at the event such as meals, a musical performance or accommodation will be subject to the 50% restriction for entertainment expenditure. Expenditure would not be subject to the 50% deduction rule, where it involves a Business advertising its own services or products by making them available to the general public at a reduced price or for free. This will also be the case where only certain individuals can benefit because they will generate publicity for the Business, such as a restaurant giving a free meal to a food critic, a spa providing free entry to an influencer, a trial run of hotel facilities provided to a potential bulk buyer of the product, etc. As another example, a Taxable Person taking a group of clients to a sporting event and providing them with tickets, meals and drinks in a corporate box will be treated as entertainment expenditure. Hence, only 50% would be treated as deductible for Corporate Tax purposes, whereas a Taxable Person purchasing a booth at a trade show to display the company’s new product line would be treated as sales/marketing expenditure for running the Business and, hence, deductible for Corporate Tax purposes. Sponsorship costs (for example, sponsoring an event) will be deductible where such costs are incurred for marketing purposes. However, to the extent that benefits are received as part of that sponsorship (for example, tickets to a sporting event) and the benefits are used to entertain business partners and/or customers, then the value of Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 36