Is depreciation deductible for Corporate Tax?

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.

• • Expenditures that are capital in nature that have not been deducted for the purpose of calculating the Taxable Income, other than those under the above bullet point, shall be deductible in the calculation of gains or losses upon the realisation of the asset or liability. In this respect, expenditures that are capital in nature shall be those treated as such under the Accounting Standards applied by the Taxable Person. While capital expenditure is not deductible, when determining Taxable Income, the depreciation of the cost of capital assets is a deductible expense for Corporate Tax purposes. Depreciation is an accounting concept which allows for the cost of an asset to be spread over the life of the asset (representing the reduction of the asset’s value). In certain cases, a Taxable Person may have an accounting policy to not capitalise low value capital items that do not meet the recognition criteria, as per the relevant Accounting Standard. Such expenditure is directly expensed in the income statement. In such circumstances, the accounting treatment should be followed and the expense will be fully deductible in the Tax Period in which it is incurred, provided that it is not otherwise non-deductible. In accordance with the relevant Accounting Standard, the Taxable Person may capitalise the directly attributable costs or costs initially incurred to acquire or construct an asset. In certain cases, a part of these costs, if debited to the income statement, would not have been allowed as a deduction while determining Taxable Income. Article 7 of Ministerial Decision No. 134 of 2023 states that the depreciation/ amortisation charge which relates to such non-deductible expenditure will also not be allowed as a deduction for the purpose of determining Taxable Income. Examples of such expenditure that could be capitalised include fees paid to Related Parties/Connected Persons which do not meet the arm’s length standard (see Section 4.5.5) or, fines and penalties levied by a statutory body/government on the acquisition or construction of the asset (see Section 4.5.9) etc. Since these expenses are generally not deductible while determining Taxable Income, the corresponding depreciation charge will also not be deductible. Example 1: Non-deductible capitalised expenditure A company incurs a fine of AED 50,000 due to non-compliance with environmental regulations while building an environmental control system. This amount is not deductible while calculating the Taxable Income as it is considered a punitive expense rather than an ordinary Business expense. If the company capitalises this fine as part of the cost base of the environmental Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 30