Can you claim entertainment expenses to calculate taxable profit?

A particular article has been included in the UAE Corporate Tax Law for the special treatment of entertainment expenses

By Mahar Afzal/Compliance Corner

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Photo for illustrative purposes only. - KT file
Photo for illustrative purposes only. - KT file

Published: Tue 28 Mar 2023, 10:45 AM

Last updated: Tue 28 Mar 2023, 12:22 PM

Taxable persons are liable to pay tax on their taxable profits. Some accounting expenses can be claimed to calculate the taxable profits, while others are not. The core objective of disallowing some expenses and allowing others is to ensure the taxable person claims only tax-allowable expenses to arrive at the taxable profits.

Regarding the deductibility of expenses, article 28 of the UAE CT law carries general provisions. Article 28 (1) states that if the revenue expenses are wholly and exclusively for business purposes, the taxable person can claim all expenses in the same tax period in which these expenses are incurred. Revenue expenses are incurred for the day-to-day operation of the business, and it does not add any value to the assets or reduce liability.


Entertainment expenses are also revenue in nature. As per the above-mentioned general provision of the law, the entire entertainment expenses would have been allowed to arrive at the taxable profits; however, a particular article no. 32 has been included in the UAE Corporate Tax Law (UAE CT Law) for the special treatment of entertainment expenses.

Article 32 of the UAE CT law states that the taxable person can claim only 50 per cent of the entertainment, amusement, or recreation expenditure incurred during a tax period. These expenses include meals, accommodation, transportation, admission fee, facilities and equipment used for entertainment, amusement or recreation of taxable person’s customers, shareholders, suppliers or other business partners.


It has been assumed that entertainment expenses have non-business use as well, and based on this non-business use assumption, fifty per cent of the expenses have been restricted. Moreover, the scope of the entertainment expenses is very wide as it also covers expenses incurred for other business partners along with entertainment expenses of customers, suppliers, and shareholders. Other business partners can be any party associated with the business, like referral partners, distributors, investors, resellers etc.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants.
Mahar Afzal is a managing partner at Kress Cooper Management Consultants.

The law is silent about the expenses incurred for the employees’ entertainment, and it raises a question about the deductibility of such expenses. Can we treat employees as other business partners and claim fifty per cent of the expenses? Though the ‘other business partners’ have not been defined in the law, but we all have the same understanding that employees cannot be classified under the business partners, so the partial allowability of the employee’s entertainment expenses has been ruled out.

I believe the Federal Tax Authority (FTA) will allow employers to claim tax deductions for the cost of entertaining employees in certain circumstances. The critical factor is whether the entertainment is wholly and exclusively for business purposes. If it is entirely for business purposes, it will be allowed. The entertainment expenses, which are compulsory for their job performance, will be allowed, like taking them for dinner. Employers will not be allowed to claim tax deductions for non-business entertainment expenses like the cost of personal entertainment for employees, such as taking them on holiday or to a private party. If the entertainment expenses have mixed-use, it would be allowed proportionately. The above is based on my understanding of global practices. Still, we need to wait for the Regulations or Ministerial decision to understand the deductibility of the employee’s entertainment expenses thoroughly.

While calculating accounting profits, entire entertainment expenses are deducted. To calculate taxable profits, fifty per cent of entertainment expenses incurred for customers, suppliers, shareholders, and others business partners will be added back to the accounting profits. For example, hotel accommodation has been provided to the taxable person’s shareholders, which costs Dhs 50,000 to the company, along with transportation and meal incurred costs of Dhs 5,000 and Dh10,000, respectively. Since the accounting expense of Dh65,000 will not be allowed for tax purposes so, 50 per cent (Dh32,500) will be added back as a non-allowable expense to arrive at the taxable profits.

The taxable persons should analyse their entertainment expenses, evaluate their deductibility, and adjust their accounting profits accordingly to calculate the taxable profits.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. This is his personal opinion which does not represent the official stance of Khaleej Times. If you have questions or require further clarification, contact Mahar at mahar@kresscooper.com.


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