Is staff entertainment 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.

4.5.10.1. Entertainment for employees Entertainment expenditure should be distinguished from expenditure incurred in relation to employees. Employment related expenditure will not fall under the ambit of entertainment expenditure and should be fully deductible, provided that it is incurred wholly and exclusively for the Taxable Person’s Business. Based on the above, expenditure reported in the Financial Statements that is incurred for employee/staff entertainment, such as staff parties, off-site events/away-days or rewards for meeting performance targets, are employee related expenses as opposed to entertainment expenses and can be fully deducted for Corporate Tax purposes. However, if an expense is incurred for an event which is private in nature, such as a wedding for family members who happen to also be staff, it will not be deductible for Corporate Tax purposes. Where a Taxable Person organises conferences and/or business events for employees, their spouses and children (such as team building events or seasonal events), for which it incurs expenditure on catering, this expenditure will be deductible since it relates to the Business of the Taxable Person and is not meant for the entertainment of non-employees, provided that the expenditure is not excessive. 4.5.10.2. Incidental expenses Any expense incurred which is incidental to a Business purpose (for example, food or drink provided during a Business meeting) shall not be considered as entertainment expenditure. Food and refreshments in an office setting would generally be considered as incidental and in connection with the Business and, hence, would be fully deductible. A further example of an incidental expense which would not be considered as entertainment expenditure would be where a retailer provides complimentary refreshments to prospective customers. Expenditure incurred for Business purposes (other than for employees) on food and beverages at a venue such as a restaurant, whether or not accompanied by any other form of entertainment (for example, a live band) cannot be considered as incidental, and so would be entertainment expenditure subject to the 50% deduction rule. 4.5.10.3. Commercial hospitality Where a Taxable Person provides commercial hospitality as part of their Business or Business Activity, such expenditure would not be considered as entertainment expenditure. For example, where an airline provides a washbag or in-flight entertainment, or where hotels provide packaged or mid-week promotions, such expenditure would be considered as ordinary Business expenditure and not Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 35

The deductibility limitation does not apply for expenditure incurred for staff entertainment. This means that, for example, the cost of internal entertainment such as staff parties can be fully deducted for Corporate Tax purposes unless the staff are family members and the event is private in nature (such as a wedding). Example 20: Entertainment expenditure R LLC is a manufacturer of IT equipment, which recently decided to expand its operations by opening a new factory. In order to celebrate the opening of the new factory and generate sales, R LLC entertained a number of customers at the new facility. R LLC’s Accounting Income for the Tax Period was AED 7,000,000, which included AED 300,000 of business entertainment expenditure. As only 50% of business entertainment expenditure is an allowable deduction for Corporate Tax purposes, AED 150,000 must be added back to R LLC’s Accounting Income when calculating its Taxable Income. Therefore, assuming there is no other adjustment which must be made, R LLC’s Taxable Income for the Tax Period is AED 7,150,000. 6.5.5. Non-deductible expenses Aside from the circumstances discussed above, deductions are also specifically disallowed for: • • • • • • Expenditure not incurred for the purposes of the Taxable Person’s Business;191 Expenditure incurred in deriving Exempt Income;192 Losses not connected with or arising out of the Taxable Person’s Business;193 A donation, grant or gift made to an organisation that is not a Qualifying Public Benefit Entity (see Section 5.7.4.2);194 Any fines and penalties, other than amounts awarded as compensation for damages or breach of contract;195 Bribes;196 191 Article 28(2)(a) of the Corporate Tax Law. 192 Article 28(2)(b) of the Corporate Tax Law. 193 Article 28(2)(c) of the Corporate Tax Law. 194 Article 33(1) of the Corporate Tax Law. 195 Article 33(2) of the Corporate Tax Law. 196 Article 33(3) of the Corporate Tax Law. General Corporate Tax Guide | Corporate Tax | CTGGCT1 71