UAE Corporate Tax: Businesses need to maintain strict tabs on entertainment expenses

It is a common knowledge now that a company in the UAE would be allowed to deduct only 50 per cent of any entertainment, amusement, or recreation expenditure incurred on customers, shareholders, suppliers or other business partners under corporate tax rules.

The restriction covers spending on meals, accommodation, transportation, admission fees, facilities and equipment used in this connection.

Company owners and management often claim that it is a common practice to meet vendors and/or customers over outings to pitch for deals, and that such expenses represent a genuine purpose to serve the business.

But that is not in question. If the business requirement of such entertainment expenses was ever in question, the expense deduction would not have been allowed at all. The restriction has been placed as such expenses have an element of personal entertainment and/or consumption.

Marketing events

The first immediate impact of 50 per cent expense restriction could be on conferences and business events. Even though these events are primarily aimed to promote business and showcase goods/services, it is likely they will have an element of entertainment aspect too.

UAE’s VAT laws have similar restrictions on recovering input credit on entertainment services, which includes food and drinks not provided in the normal course of a meeting. The Federal Tax Authority’s clarification expressly provides that recoverability of input tax in respect of costs incurred for catering services during conferences would be dependent on whether any fee is charged from the attendees.

While restrictions under the VAT law is confined to food and beverages, the UAE corporate tax law covers ‘any’ entertainment expenditure. The list of expenses is only illustrative. A natural extension may cover amounts paid to brand ambassadors and celebrities to attend such promotional events.

Employees vs outsourced employees

The 50 per cent restriction does not apply to expenditure incurred on employees. The entire expenditure incurred on meals, accommodation and transportation of employees is allowed as a deduction from taxable income.

UAE companies often engage manpower service providers to provide personnel often referred to as ‘outsourced employees’.

Such personnel are technically not the employees of the company even though they work with and among other employees. Just like any other supplier, the manpower service providers periodically issue invoices for the supply of manpower services.

It needs to be examined if any entertainment expenditure, even if immaterial in value, incurred on such ‘outsourced employees’ should also be restricted to 50 per cent. If yes, identifying such expenses and maintaining documents for future audits would be a significant task for companies.

As the entertainment expenditure incurred on employees is allowed in full, I often get questioned on gifts - for marriage, festivals, long service rewards - given to employees. Would expense on such gifts be allowed as a deduction?

The question emanates from the VAT laws on the recovery of input credit on such expenses. While entertainment expenditure on employees are allowed under corporate tax, there is general restriction on donations, grants and gifts unless given to qualified entities. Companies will need to be alert of such nuanced differentiation while determining the nature of expenses incurred on employees.

Domestic vs international

Another common question often asked is whether this restriction would apply to expenses incurred outside UAE. In the era of globalisation, it cannot be denied that the customers, vendors and business partners would also be located outside UAE.

The restriction on entertainment expenses is not limited to domestic expenses but would equally apply to similar expenses incurred outside UAE.

A seemingly innocuous provision could have significant implications on the tax obligations of a company…