Depreciation: what it means for UAE businesses.

What depreciation means

Depreciation spreads the cost of a tangible fixed asset, such as a van, a machine, fit-out or computers, over the years the business expects to use it. Buying the asset is not an expense in the year of purchase. Instead, part of its cost is charged to profit each year until the asset is used up or sold.

UAE SMEs normally follow Section 17 of IFRS for SMEs, or IAS 16 under full IFRS. The business picks a method that matches how the asset is used up, most often straight line, estimates a useful life and a residual value, and reviews them when circumstances change. Land is not depreciated.

The UAE angle is Corporate Tax. The Corporate Tax Law does not publish its own depreciation rates. Capital spending is not deductible when incurred, but the Federal Tax Authority treats the depreciation charged in accounts prepared under IFRS or IFRS for SMEs as deductible, subject to the normal rules. Ministerial Decision No. 134 of 2023 adds one limit: depreciation on a capitalised amount that would not have been deductible as an expense, such as a fine, is not deductible either. Recoverable input VAT stays out of the asset's cost.

How it works

• Cost includes the purchase price, import duties, non-refundable taxes and costs of getting the asset ready for use. Recoverable input VAT is not part of cost.
• Depreciable amount is cost less residual value, allocated on a systematic basis over the useful life. Methods include straight line, diminishing balance and units of production.
• Depreciation starts when the asset is available for use and does not stop just because the asset is idle.
• Corporate Tax: capital expenditure is defined by the accounting standard the business applies, and the related depreciation is deductible unless the underlying cost would itself have been non-deductible.
• The Tax Procedures Executive Regulation requires records of fixed assets to be kept with the accounting books.
• VAT on assets is handled separately: large capital assets can fall under the VAT Capital Assets Scheme, which is not linked to the depreciation charge.

Worked example

An Ajman printing business buys a machine for AED 210,000 including VAT. It expects to use it for six years and sell it for AED 20,000 at the end. It depreciates on a straight line basis.

Invoice total including VAT	AED 210,000
Recoverable input VAT at 5%	AED 10,000
Cost of the machine	AED 200,000
Estimated residual value	AED 20,000
Depreciable amount	AED 180,000
Annual depreciation over 6 years	AED 30,000

The AED 30,000 charge reduces accounting profit each year and, as long as the cost is a normal business cost, reduces Taxable Income by the same amount.

Common mistakes

• Adding recoverable input VAT to the asset's cost, which overstates both the asset and the depreciation charge.
• Depreciating land, or putting the whole cost of a building and its land into one asset line.
• Capitalising a fine or a non-arm's length related party fee into an asset and then deducting the depreciation on it for Corporate Tax.

The law

• Ministerial Decision No. 134 of 2023 on the General Rules for Determining Taxable Income, Article 7 (capital expenditure and depreciation)
• Federal Decree-Law No. 47 of 2022, as amended, Article 28, Clause 1 (expenditure not capital in nature) and Article 33, Clause 2 (fines not deductible)
• Cabinet Decision No. 74 of 2023, Executive Regulation of the Tax Procedures Law, Article 2 (records of fixed assets)

Frequently asked questions

Does the FTA set depreciation rates for Corporate Tax?

No rates are set in the Corporate Tax Law. The Federal Tax Authority's guidance follows the depreciation in financial statements prepared under IFRS or IFRS for SMEs, so the useful lives you choose must be reasonable and supportable.

Can we expense small items like a AED 900 office chair?

Yes, if your accounting policy sets a sensible capitalisation limit. The Federal Tax Authority's guide accepts that low value items expensed under that policy are deductible when incurred, if otherwise deductible.

Related terms

Amortisation · Capital assets scheme · Taxable income · IFRS for SMEs · Balance sheet. See every term in the UAE tax glossary.

For the full picture, read our guide: Month-end close for UAE SMEs: a practical checklist.

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