Common items, and how they are treated
| Expenditure | Treatment | Note |
|---|---|---|
| Staff salaries and benefits | Deductible | Including end-of-service accrual where properly recognised |
| Rent, utilities, insurance | Deductible | Business premises and business policies |
| Professional fees | Deductible | Accounting, legal, audit, consultancy |
| Marketing and advertising | Deductible | Distinct from entertainment |
| Client entertainment | Partially disallowed | A standing adjustment, not a one-off |
| Fines and penalties | Not deductible | Including tax penalties, so a AED 10,000 penalty costs the full amount |
| Interest | Deductible subject to a limitation | Specific rules where the lender is related |
| Owner or director remuneration | Deductible up to arm’s length value | The excess is added back |
| General provision for doubtful debts | Not deductible | A specific provision meeting the criteria is |
| Donations | Deductible only to approved recipients | Qualifying public benefit entities |
| Capital expenditure | Not deductible as expense | Relieved through depreciation instead |
| Private or personal costs | Not deductible | Including the private proportion of mixed-use items |
The general rule is permissive and the exceptions are narrow. Most businesses find that the great majority of what they spend is deductible, and that a small number of specific items account for the whole difference between accounting profit and taxable income.
Working through it
The test has two limbs and both have to be satisfied.
The first is purpose: the expenditure must be incurred wholly and exclusively for the business. That excludes personal costs and, importantly, the private proportion of anything used for both purposes. A vehicle used partly privately is deductible only as to its business proportion, and the apportionment needs a basis rather than an assertion.
The second is character: the expenditure must not be capital in nature. A cost that creates or enhances an asset with a lasting benefit is capital, relieved through depreciation over time rather than deducted at once. The recurring judgement here is repairs against improvements, routine maintenance is expense, an overhaul that extends an asset’s life is capital.
Beyond those two limbs sit the specific statutory restrictions, and those are what actually generate adjustments in practice. They are worth knowing individually rather than in general terms, because each behaves differently.
The restrictions that generate most adjustments
Six categories account for nearly all of the add-backs we see in owner-managed businesses:
- Fines and penalties: disallowed entirely, including tax penalties. This means a compliance failure costs its full face value with no tax relief to soften it
- Entertainment: partially disallowed. Client hospitality is the usual line, and it recurs every year rather than being an isolated adjustment
- Interest: subject to a general deduction limitation, with additional rules where the lender is a related party. Highly geared group structures need this modelled rather than assumed
- Connected person payments: owner salary, management fees, rent to a shareholder’s property. Deductible only up to what an unconnected party would have received for the same thing
- General provisions: disallowed. A round-sum doubtful debt provision is added back in full, whereas a specific provision against identified customers meeting the criteria is not
- Donations: deductible only where made to an approved public benefit entity, not to causes generally
The fourth is the one that costs the most and is noticed the least, because it does not look like a tax item. An owner drawing what the business can afford rather than what the role commands has created an adjustment nobody has identified.
Capital versus revenue, in practice
This distinction decides whether a cost reduces this year’s taxable income or is relieved gradually over an asset’s life, and it comes up more often than businesses expect.
Generally revenue: routine repairs and maintenance, replacing a part to restore working order, redecoration, consumables, ordinary software subscriptions.
Generally capital: acquiring an asset, a major overhaul that extends useful life, an improvement that enhances capability beyond its original state, fit-out of new premises, and development costs meeting the capitalisation criteria.
The pressure runs in both directions and neither instinct is a policy. A business under margin pressure has an incentive to capitalise; a business wanting a deduction has the opposite. What is needed is a consistent documented basis, applied the same way each year, because it will be tested by an auditor and, since taxable income starts from accounting income, potentially by the FTA as well.
Evidence is the practical constraint
Most disputes about deductibility are not disputes about the law. They are about whether the expenditure can be shown to have been incurred, for the business, at the amount claimed.
Which makes documentation the operative issue for most businesses rather than statutory interpretation. Records must be kept for 5 years generally; 15 years for real estate records, and the penalty for failing to keep them is AED 10,000 first offence, AED 20,000 for repeat (Cabinet Decision 129 of 2025).
The recurring practical failures are the same across every sector:
- Business and personal spending run through the same account, so nothing can be cleanly attributed
- Cash expenditure with no supporting documentation
- Mixed-use items claimed in full with no apportionment basis
- Payments to related parties with no agreement evidencing what was provided
- Costs recorded but with no invoice retained, particularly for input tax purposes
- Expenses reimbursed to an owner personally with no underlying receipts
Separating business and personal banking is the single cheapest improvement available here, and it is very often the missing one.
What trips people up
- Assuming anything paid by the business is deductible. The wholly and exclusively test excludes private elements.
- Deducting fines and penalties, which are disallowed in full including tax penalties.
- Claiming a mixed-use asset entirely, without an apportionment basis.
- Taking a general provision as a deduction rather than a specific one.
- Paying owner remuneration by affordability and deducting it in full.
- Expensing capital items, or capitalising repairs, depending on what the year needs.
- Claiming costs with no supporting documentation, which is where most deductibility problems actually arise.
How to act on this
- Separate business and personal banking, if you have not.
- Review the six restricted categories against your ledger and identify what needs adjusting.
- Establish an arm’s length basis for owner remuneration before the year end, not during the return.
- Set a consistent capital versus revenue policy and apply it the same way each year.
- Check your provisions: convert round-sum general provisions to specific assessments where you can.
- Fix the documentation, because that is where most deductions are actually lost.
Related questions
Frequently Asked Questions
What is the general rule for deductibility?
Expenditure incurred wholly and exclusively for the purposes of the business, and not capital in nature, is deductible. Most ordinary operating costs satisfy that. The specific statutory restrictions are what generate adjustments.
Is my salary as owner deductible?
Only to the extent it reflects arm’s length value for the role actually performed. It is a connected person payment, and the excess above market value is added back. Setting the figure by what the business can afford rather than by reference to the role is the most common cause.
Are fines and penalties deductible?
No, including tax penalties. That means a AED 10,000 late-registration penalty costs the full amount with no tax relief to offset any part of it, which strengthens the case for pursuing a waiver where one is available.
Can we deduct client entertainment?
Partially, entertainment is subject to a specific restriction, and it is a standing annual adjustment rather than an isolated one. Marketing and advertising are treated differently and are generally deductible in full.
What is the difference between a general and a specific provision?
A general provision is a round-sum estimate against a class of balances and is not deductible. A specific provision identifies particular debts or obligations and, where it meets the criteria, is. Converting a round-sum doubtful debt provision to a customer-by-customer assessment frequently changes the position.
Are donations deductible?
Only where made to an approved public benefit entity. Contributions to causes generally, however worthwhile, do not qualify.
Repairs or improvement?
Routine maintenance restoring working order is revenue and deductible. An overhaul extending useful life, or an improvement enhancing capability beyond the original state, is capital and relieved through depreciation. What matters is a consistent documented basis rather than the answer that suits the year.
Can we deduct expenses paid personally by the owner?
Where they were genuinely incurred for the business and are properly documented and reimbursed, yes. Where there are no underlying receipts and the amounts are round sums, the position is much weaker, which is an argument for the reimbursement process rather than against the deduction.
How long do we need to keep the evidence?
5 years generally; 15 years for real estate records, with the penalty for failure being AED 10,000 first offence, AED 20,000 for repeat (Cabinet Decision 129 of 2025). Most deductibility problems are evidential rather than legal, so retention is not administrative housekeeping. It is what makes the deduction hold.
Six categories account for nearly every adjustment. Send us a trial balance and we will show you which of them apply to your ledger.
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Last reviewed 27 July 2026. Rates, thresholds and deadlines change, the e-invoicing provider deadline has already moved once. Confirm current requirements with the Federal Tax Authority before acting, or ask us to check your position.