What Does ‘Wholly and Exclusively’ Mean?

Without being “wholly and exclusively”, deductions are not available in the UAE

Section 28 of the UAE Corporate Tax Law prescribes that, to be deductible in the UAE, “expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature shall be deductible in the Tax Period in which it is incurred”. This adopts the UK’s use of the words “wholly and exclusively” and Australia’s use of the word “incurred”. To understand what these actually mean, we need to identify and obtain guidance from the FTA, then focus on guidance and precedent in the UK and Australia.

We can begin to understand the complexities by considering the deductibility of legal expenses incurred by the employer in the recent Dubai Court of First Instance Case No. 309 of 2025. That case considered whether an employee or employer was liable for a fine imposed by the FTA on a company for late corporate-income-tax registration, and the impact on unpaid employment benefits.

Background to the case

In Case No. 309, the employee sued the employer for various entitlements, including gratuity, unpaid salary and wrongful-dismissal compensation. The employer counterclaimed, asserting that the employee’s negligence led to an AED 10,000 FTA penalty for the company’s delayed corporate-tax registration.

The employee worked in the employer’s accounts department. The employer stated that the employee’s failure to complete the tax registration on time caused the company material damage.

Relying on tortious-liability principles under the UAE Civil Transactions Law, the employer maintained that the employee’s omission — a wrongful act — led directly to the company incurring the penalty, and that the employee was therefore financially responsible for the company’s loss. The court set out to determine whether the employer had sufficient evidence to confirm this assertion.

Application of the law

Departing from labour law, the court considered basic civil-liability principles related to wrongful acts. For an individual employee to be held personally liable for penalties incurred by the company, the employer must prove:

• Fault: the employee intentionally or negligently omitted to carry out a specific duty.
• Damage: as a result of this omission, the company suffered a verifiable financial loss.
• Causation: the employee’s fault and the damage incurred were clearly linked.

Aligning with Article 282 of the UAE Civil Transactions Law, these principles emphasise that the burden of proof rests firmly on the employer.

The court’s findings

The court dismissed the employer’s counterclaim for two principal reasons.

First, the employer did not prove fault and causation. It could not demonstrate that the employee’s failure to register for corporate tax on time was the only reason for the penalty. Concrete evidence was needed to show that registration was the employee’s formal responsibility, that this responsibility was neglected and that the neglect directly caused the FTA fine.

Second, the employer did not prove material loss or damage. It provided neither an official FTA penalty notice nor confirmation that the fine had been paid. A mere assertion that a fine was settled was insufficient; documentary evidence, such as a bank receipt or FTA confirmation, was required.

Deductible legal fees

Theory

How can the legal fees incurred by the employer in defending a position that was ultimately unsuccessful be defended as deductible for corporate-tax purposes?

Some support is found in the FTA’s General Corporate Tax Guide, which states that, for expenditure to be fully deductible, the full amount must have been incurred solely for business purposes.

The FTA also states that, if expenditure is incurred partly for business and partly for another purpose, it must be apportioned so that only the part relating to the derivation of taxable income is allowed as a deduction. The apportionment must be made on a fair and reasonable basis.

What is fair and reasonable depends on the facts and circumstances of each case. More than one method may be appropriate. The chosen approach should accurately reflect the underlying activity, should not be unnecessarily burdensome or complex for the taxable person to determine and justify, and should be understandable and reviewable by the FTA.

Practice

In determining whether these legal fees would be deductible, should the focus be on the underlying FTA fine or on the employment dispute concerning unpaid benefits?

If the prime focus is the former, the legal fees would not have been incurred wholly and exclusively for the purpose of the business. If it is the latter, they would be, because most — though not all — employment matters are business matters.

In this case, we expect the legal fees would be deductible to the employer for UAE corporate-income-tax purposes because the dispute concerned the employer’s defence of claims for gratuity, unpaid salary and wrongful-dismissal compensation, each of which is a business issue.

Action

The “wholly and exclusively” concept is complex. A company about to enter legal action, anticipating legal action or already involved in it should properly consider the deductibility of its legal fees. It should also consider whether it is entitled to claim an input-tax credit for the VAT charged by the lawyer on those fees.