With the enactment of the UAE Corporate Tax regime through Federal Decree-Law No. 47 of 2022, businesses in the UAE must now understand how to treat fixed assets and long-term capital expenditures for tax purposes. A key component of this is the concept of capital allowances and depreciation, which directly affects taxable income and the effective tax burden.
Capital allowances enable businesses to deduct the cost of capital assets over time instead of claiming the full expense in the year of purchase. This blog provides a comprehensive explanation of how depreciation and capital allowances work under the UAE Corporate Tax system.
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1. What Are Capital Allowances?
Capital allowances are deductions allowed for the depreciation or amortization of qualifying capital assets over their useful economic life. Instead of deducting the full cost of an asset in the year it is acquired, a portion of the cost is spread over multiple years, reflecting the consumption of the asset’s value during business operations.
This approach aligns taxation with accounting practices and ensures businesses don’t claim excessively large deductions in a single year for long-term investments.
2. Capital Assets Eligible for Allowances
The UAE Corporate Tax framework generally permits capital allowances for tangible and intangible assets used in the business, including:
- Buildings and structures
- Plant and machinery
- Vehicles (commercial use only)
- Furniture and office equipment
- Computers and IT infrastructure
- Patents, licenses, software, and trademarks
Assets used for personal purposes or not contributing to taxable income are excluded from capital allowance eligibility.
3. Capital Allowance vs. Depreciation
It’s important to differentiate between capital allowance (used for tax purposes) and depreciation (used in financial accounting). While depreciation methods like straight-line or reducing balance are applied in financial statements, tax depreciation — or capital allowances — are based on rates prescribed or accepted by the UAE tax authorities.
The Federal Tax Authority may not accept accounting depreciation for corporate tax computation. Businesses must instead follow FTA-approved capital allowance methods.
4. Prescribed Depreciation Rates in the UAE (Indicative)
While UAE Corporate Tax law has not published a fixed capital allowance table yet, the following indicative rates (used in many tax systems and referenced by UAE advisors) may be applied pending official guidance:
- Buildings: 4% per annum
- Plant and Machinery: 15% per annum
- Computers and IT Assets: 33.33% per annum
- Furniture and Fixtures: 10% per annum
- Vehicles: 25% per annum (if not for personal use)
- Intangibles (software, licenses): Based on estimated useful life (e.g., 2-5 years)
Note: The UAE Ministry of Finance may release official rates in due course.
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5. First-Year Depreciation and Asset Classification
In the year of acquisition, capital allowances are generally prorated based on the number of months the asset was in use. Assets acquired and brought into use mid-year may be eligible for partial depreciation.
Example:
A machine costing AED 100,000 purchased and installed on July 1st (mid-year) with an annual depreciation rate of 15% would receive:
First-year allowance: AED 100,000 × 15% × (6/12) = AED 7,500
6. Capital Allowance Restrictions and Adjustments
The UAE tax framework may disallow capital allowances on certain assets or expenditures, including:
- Assets not used in the production of taxable income
- Private or personal use vehicles
- Assets used in exempt or zero-profit activities (e.g., qualifying free zone income)
Additionally, capital allowances may be limited if assets are transferred between related parties or depreciated using an accounting method not aligned with tax requirements.
7. Disposal of Depreciable Assets
When a business sells or scraps an asset, the tax depreciation claimed over its useful life must be reconciled with its sale value or residual value.
If the sale proceeds exceed the tax written-down value, a capital gain may arise. Conversely, if the sale value is lower, the remaining tax base may be deducted (known as a balancing allowance).
Example:
- Asset cost: AED 100,000
- Accumulated depreciation over 3 years: AED 45,000
- Sale price: AED 60,000
Remaining tax base: AED 55,000 → Profit on sale = AED 60,000 – AED 55,000 = AED 5,000 (taxable)
8. Treatment of Leased Assets
For finance leases (ownership effectively transferred), the lessee may claim depreciation/capital allowances. For operating leases, lease payments are typically deductible as business expenses instead.
It is essential to analyze the lease classification under IFRS and FTA tax guidelines to determine proper tax treatment.
9. Impact on Taxable Income and Cash Flow
Proper application of capital allowances can substantially reduce taxable income, leading to lower corporate tax payments and improved cash flow management. Strategic asset purchases and depreciation planning play a vital role in corporate tax optimization.
For businesses planning large-scale investments in infrastructure, machinery, or technology, it is critical to plan the depreciation strategy in advance.
10. Best Practices for Capital Allowance Compliance
- Maintain a fixed asset register with date of acquisition, cost, and useful life
- Align tax depreciation with FTA guidance
- Reconcile accounting and tax depreciation annually
- Keep documentation for asset purchases and valuations
- Consult with tax professionals for asset planning and classification
11. Conclusion
The UAE corporate tax law allows for capital allowances on qualifying business assets, providing a tax-efficient way to recover capital expenditure. Understanding how depreciation works, and distinguishing between recoverable, disallowed, or non-qualifying assets is crucial for accurate tax reporting and optimal deductions.
Unsure how to structure depreciation for your capital assets? Get professional assistance from PEAK Business Consultancy Services. Our tax specialists help businesses across the UAE plan, calculate, and claim capital allowances in line with the latest UAE tax regulations.
