Which expenses are deductible for Corporate Tax?

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.

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.

Example 15: Capital or revenue expenditure If a building contractor buys a car for use by office staff, this car will bring an enduring benefit to the business, and will be treated as a capital asset. Therefore, the expenditure incurred in acquiring this vehicle will likely not be deductible for Corporate Tax purposes. The costs of maintaining this vehicle will be deductible as they do not provide an enduring benefit to the business. On the other hand, if the same car was purchased by a car dealership business to be resold, then the costs of acquiring the vehicle would likely be treated as deductible for Corporate Tax purposes, as in this case, the car is more akin to inventory and the cost would be revenue in nature. Example 16: Capital or revenue expenditure A cake shop buys a computer for use by office staff, and this computer has an expected useful economic life of 5 years. The initial expenditure for acquiring this computer will likely be treated as capital expenditure and not be deductible for Corporate Tax purposes, as this expenditure brings an enduring benefit to the business. If the business recognises a depreciation expense over the useful life of the asset, then this expenditure is deductible in the year the depreciation expense is recognised. 6.5.4. Special rules for the deductibility of certain expenses Interest expenditure Businesses regularly borrow money and take out loans for a wide variety of reasons, for example to purchase business assets, to meet costs, or increase working capital. As a result, Interest is a common business expense. Interest expenditure can be deducted when calculating Taxable Income for the Tax Period in which it is incurred.170 However, there are some limitations on the deduction of Interest expenditure.171 170 Article 29 of the Corporate Tax Law. 171 Articles 30 and 31 of the Corporate Tax Law. General Corporate Tax Guide | Corporate Tax | CTGGCT1 64

Article 11 – Expenditure in Relation to the Acquisition and Disposal of a Participating Interest 1. Expenditure incurred in relation to the acquisition, sale, transfer, or disposal of an entire Participating Interest or part of a Participating Interest shall not be deductible in accordance with Article (22) and paragraph (b) of Clause (2) of Article (28) of the Corporate Tax Law. 2. Expenditure referred to in Clause (1) of this Article shall include, but not be limited to, any of the following: a. Professional fees. b. Due diligence costs. c. Litigation costs. d. Commissions and brokerage fees. e. Stamp duty, registration duties and other irrecoverable taxes. f. Appraisal and valuation costs. g. Refinancing costs. 3. Interest expenditure incurred in relation to the acquisition and subsequent holding of a Participating Interest shall be deductible subject to Chapter Nine of the Corporate Tax Law. 4. The expenditure as specified in Clause (1) of this Article shall be capitalised as part of the acquisition cost of the Participating Interest.