UAE Corporate Tax on Leases and Rent Expense 2026...

Agreement document with scrabble tiles and pens on a desk, illustrating lease and rent costs for UAE corporate tax

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A company signs a three-year lease for an office in Dubai and pays AED 100,000 a year. Its accountant records the lease under IFRS 16, so the profit and loss account no longer shows a simple AED 100,000 “rent” line. It shows depreciation of a right-of-use asset and interest on a lease liability. The owner then asks the tax question: what exactly does the Federal Tax Authority (FTA) let us deduct for this lease?

The short answer is that Corporate Tax follows the accounts. Taxable income starts from accounting income, so the lease charges that sit in the profit and loss account are the starting point. The tax rules then step in at specific points: the general “wholly and exclusively” test, the interest deduction limitation, and the rules for payments to related parties and connected persons. This guide is for UAE tenant companies renting offices, shops, warehouses, labour accommodation, vehicles and equipment. It follows Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Articles 20, 28, 29, 30, 34, 36 and 56), Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule, and the FTA Corporate Tax Guides on Interest Deduction Limitation Rules (CTGIDL1) and Determination of Taxable Income (CTGDTI1). The landlord side of the same lease is covered separately in our guide to UAE Corporate Tax on rental income.

Published: 26 October 2026

Quick Answer

Taxable income starts from the accounting income in your financial statements (Article 20 of the Decree-Law). Whatever lease cost your accounts correctly record is the starting point for the tax computation.
Under IFRS 16, a lease usually appears as depreciation of the right-of-use asset plus interest on the lease liability, not as one rent line. Both are charged to profit, so both start inside accounting income.
The interest part of a lease counts as “Interest” for the general interest deduction limitation rule. That rule only bites when net interest expenditure for the tax period is above AED 12,000,000.
Rent paid to an owner, a director or their related parties (a Connected Person) is deductible only to the extent it matches Market Value (Article 36).
Keep the lease contract, payment proof and the lease schedule for seven years after the end of the tax period (Article 56).

Why Lease Accounting Changes the Shape of the Deduction

For many years, a tenant simply wrote “rent expense” in the accounts: AED 100,000 paid, AED 100,000 charged. IFRS 16 changed that for companies that apply full IFRS. A lessee that rents an asset for more than a short period now recognises two things on day one:

A right-of-use asset, which represents the right to use the property or equipment for the lease term.
A lease liability, which is the present value of the future lease payments.

Each year the right-of-use asset is depreciated, and the lease liability grows by interest and falls by the payments made. The profit and loss account therefore carries depreciation plus interest. The total charge over the whole lease is the same as the total rent paid, but the timing is different: the charge is higher in the early years and lower in the later years, because interest is calculated on a larger liability at the start.

The Decree-Law does not write a special lease code for tenants. Article 20(1) says taxable income is determined from financial statements prepared under accounting standards accepted in the State, and Article 20(2) says it is the accounting income adjusted for the items the law lists. The FTA guides we reviewed (the Accounting Standards guide, the Determination of Taxable Income guide and the Interest Deduction Limitation guide) do not set out a separate deduction regime for rent. The only lease-specific tax rule we found is the treatment of the finance element as Interest, covered below.

The General Test for Any Lease Cost

Article 28(1) says expenditure incurred wholly and exclusively for the purposes of the taxable person’s business, and not capital in nature, is deductible in the tax period in which it is incurred. Article 28(2) lists what is not deductible, including expenditure not incurred for the business and losses not connected with the business. Article 28(3) allows a fair and reasonable proportion where expenditure serves more than one purpose.

For leases this means:

Business premises and equipment. Rent for an office, shop, warehouse or machine used in the business passes the test.
Mixed use. If a company rents a villa and part of it is a family home for the owner, only the identifiable business part can be deducted under Article 28(3). Records that show the split are essential.
Capital in nature. The Determination of Taxable Income guide explains that capital expenditure is not deducted as such, but depreciation of capital assets is deductible, and that the accounting treatment decides what is capital. A right-of-use asset is capitalised under IFRS 16, so its deduction comes through depreciation, not through a single payment.
Depreciation of non-deductible costs. Ministerial Decision No. 134 of 2023 (Article 7) denies depreciation on capitalised expenditure that would not have been deductible had it been expensed. A lease cost that fails the business test therefore cannot be rescued by capitalising it.

You can read how depreciation is treated generally in our UAE Corporate Tax depreciation rules guide, and the wider deduction test in our UAE Corporate Tax deductible expenses guide.

Lease Interest and the Interest Limitation Rules

Article 29 of the Decree-Law makes interest expenditure deductible, subject to Article 28 and to Articles 30 and 31. Article 30 is the general interest deduction limitation rule: net interest expenditure is deductible up to 30% of accounting EBITDA (earnings before interest, tax, depreciation and amortisation), with disallowed amounts carried forward for ten tax periods. Article 30(3) lets the Minister set an amount below which the limit does not apply.

Ministerial Decision No. 126 of 2023 sets that amount. Under Article 8, the limitation does not apply where net interest expenditure for the tax period does not exceed AED 12,000,000. Where it does exceed that amount, the deductible amount is the higher of AED 12,000,000 and the percentage of EBITDA under the Decree-Law.

The decision also decides what counts as Interest for a lease. Article 5 says the finance element of finance lease payments, as documented in the accounts, is Interest. It says the finance element of non-finance lease payments is also Interest. The FTA Interest Deduction Limitation guide confirms the practical result for a tenant: where the lessee has a right-of-use asset, there is a finance element for accounting purposes, and that finance element is considered Interest. The guide’s own Example 10 shows a lessee with a lease liability of AED 118,195 and an annual payment of AED 26,000 calculating implicit interest of AED 4,610 for the year, and treating that amount as Interest.

What this means in practice:

Most small and mid-sized tenants are unaffected. If total net interest expenditure, including lease interest and bank loan interest, stays under AED 12,000,000, the 30% EBITDA cap does not apply and the lease interest is deducted like any other accounting charge.
Large tenants must include lease interest in the count. A retailer or logistics company with many leased sites can have material lease interest. It has to be added to loan interest when testing the AED 12 million threshold.
Depreciation is not Interest. Only the finance element is counted. The right-of-use depreciation stays a normal depreciation charge.
Short-term and low-value leases. IFRS 16 lets a lessee choose not to recognise a right-of-use asset for short-term leases (12 months or less) and low-value assets, and to expense the payments instead. In that case there is no lease liability and no interest in the accounts. This follows from the accounting treatment rather than from a separate tax rule, and the FTA guides we reviewed do not say anything different.

For a full explanation of the cap, see our guides on the 30% EBITDA interest limitation rule and interest deduction under UAE Corporate Tax.

Worked Example: A Three-Year Office Lease

A UAE mainland company leases an office for three years. It pays AED 100,000 at the end of each year. It discounts the payments at 5% a year, which gives a lease liability on day one of AED 272,325 (the present value of three payments of AED 100,000). The right-of-use asset is also AED 272,325 and is depreciated in a straight line over three years: AED 90,775 a year. These are illustrative numbers, not an FTA example.

Year	Opening liability (AED)	Interest at 5% (AED)	Payment (AED)	Closing liability (AED)	Depreciation (AED)	Total charge to profit (AED)
1	272,325	13,616	100,000	185,941	90,775	104,391
2	185,941	9,297	100,000	95,238	90,775	100,072
3	95,238	4,762	100,000	0	90,775	95,537
Total		27,675	300,000		272,325	300,000

How the tax computation works:

Accounting income already includes the total charge in each year: AED 104,391, AED 100,072 and AED 95,537.
The company’s net interest expenditure is far below AED 12,000,000, so Article 30 does not limit the AED 13,616, AED 9,297 and AED 4,762 of lease interest.
The business test in Article 28 is met because the office is used for the business.
Over the three years the company deducts AED 300,000 in total, the same as the rent paid. Only the timing differs: AED 4,391 more than the cash rent is deducted in year 1, and AED 4,463 less in year 3.

If the company had instead used the short-term lease exemption for a 12-month contract, it would simply expense the AED 100,000 rent in that year with no interest component.

Timing Differences and Cash Basis

Because the IFRS 16 charge is front-loaded, the deduction in the early years is higher than the cash rent. This is a timing difference only. It does not create a permanent tax benefit or cost, and it needs no special adjustment as long as the accounts are correct and the taxable income starts from them.

A company that is allowed to use the cash basis of accounting for Corporate Tax is in a different position, because its income and expenses follow cash. Check the conditions in our guide on cash basis versus accrual basis before assuming either method applies to your leases.

Rent in Advance, Deposits and Prepaid Rent

Many UAE leases are paid in one to four cheques a year, with a refundable security deposit. The tax result follows the accounting result:

Rent paid in advance. Under accrual accounting, only the part of the rent that relates to the tax period is charged to profit. The rest is a prepayment on the balance sheet. A cheque paid in December for the following year is not a current-year deduction.
Security deposits. A refundable deposit is a receivable, not an expense. It becomes a cost only if the landlord keeps part of it, for example for damage.
Commission and fees. Broker fees and registration costs may be capitalised into the right-of-use asset under IFRS 16 as initial direct costs. They are then deducted through depreciation over the lease term, not all at once.

Lease Changes and Early Termination

Real leases change. The rent is renegotiated, the area is extended, or the tenant leaves early. In the accounts, a lease modification usually leads to the lease liability and right-of-use asset being remeasured.

For the interest limitation rules, Article 5(5) of Ministerial Decision No. 126 of 2023 says that if the terms of a lease are amended, the finance element is recalculated as if a new lease had been entered into at the date of the amendment. Keep the revised schedule with the signed amendment.

For early termination, the gain or loss recorded in the accounts when the lease ends is part of accounting income and flows into taxable income unless a specific rule in the Decree-Law adjusts it. Where a termination payment is made to the landlord, record why the lease ended and what the payment covers, so that the business purpose under Article 28 can be shown. If the lease is terminated with a related party or a Connected Person, the payment must also meet the arm’s length and market value tests below.

Rent Paid to Related Parties and Connected Persons

This is the area where tenant companies most often run into trouble. Many UAE businesses rent premises from the owner, a director or a company the owner controls.

Connected Persons (Article 36). A payment or benefit to a Connected Person is deductible only if and to the extent it corresponds with the Market Value of what is provided, and it is incurred wholly and exclusively for the business. A Connected Person is an owner, a director or officer, or a Related Party of either. If the company pays an owner AED 400,000 a year for an office that the market rents for AED 250,000, the excess is at risk of being denied.
Related Parties (Article 34). Transactions with Related Parties must meet the arm’s length principle, meaning they are priced as independent parties would price them.
Evidence. Keep a written lease, comparable rents for similar space in the same area, and proof that the payments were actually made. The FTA guides expect market value support, and the detail is explained in our guides on connected persons and transfer pricing in the UAE.

A lease that the company never paid under, or a “free” office provided by an owner, raises its own questions. Where no rent is charged, there is no deduction, but an owner-provided benefit should be documented so that nothing is later argued about the arm’s length level.

Free Zone Companies and Qualifying Free Zone Persons

A free zone company starts from accounting income in the same way. For a Qualifying Free Zone Person, the question is which income the expense relates to. Article 28(3) of the Decree-Law allows a fair and reasonable proportion where expenditure is incurred for more than one purpose. A company with both qualifying and non-qualifying activities should allocate shared office rent on a documented basis, such as floor area or staff time. Our guides on QFZP status and qualifying income explain how the income split works.

Many free zone companies rent only a flexi-desk or a shared licence office. These are usually fees for a service package. The same principles apply: the cost must be for the business, supported by an invoice and a contract, and recorded in the accounts.

Evidence: Tenancy Contracts, Ejari and Tawtheeq

Neither the Decree-Law nor the FTA guides we reviewed make tenancy registration a condition of deduction. Registration is still very useful evidence. In Dubai the tenancy contract is registered on Ejari, and in Abu Dhabi on Tawtheeq. A registered contract shows the landlord, the premises, the period and the rent, which is exactly what an FTA reviewer will ask for. Our companion Yalah Dubai guide on Tawtheeq tenancy contracts in Abu Dhabi explains the registration side. For the staff side of running a leased business, Yalah Dubai also covers bereavement, study and Hajj leave in the UAE.

Record-Keeping

Article 56 requires a taxable person to keep records and documents for seven years following the end of the tax period they relate to. They must support the information in the tax return and allow taxable income to be readily ascertained. For leases, keep:

The signed lease and every amendment.
Proof of payment for each rent instalment.
The lease schedule showing liability, interest and depreciation.
Landlord invoices or receipts, and VAT invoices where VAT applies.
Market rent evidence for any related-party or connected-person lease.

See our full guide to Corporate Tax record-keeping requirements.

Common Mistakes

Deducting cash rent and IFRS 16 charges together. If the accounts already show depreciation and interest, adding the cash rent again double counts the cost.
Ignoring lease interest in the AED 12 million test. Large tenants must include it with loan interest.
Paying a connected landlord above market. The excess is exposed to denial under Article 36.
Deducting a full year’s rent paid in advance. Only the part for the tax period belongs in that period under accrual accounting.
Mixing private and business use. Residential rent for the owner’s family is not a business expense.
Having no written lease. An oral arrangement is hard to defend when payment proof is the only evidence.
Forgetting lease changes. An unrecorded rent increase or area change leaves the schedule wrong.

Frequently Asked Questions

Is rent deductible for UAE Corporate Tax?

Yes, if it is incurred wholly and exclusively for the business and is recorded in the accounts. Article 28(1) of the Decree-Law makes business expenditure that is not capital in nature deductible in the period it is incurred. Under IFRS 16 the deduction usually comes as depreciation plus lease interest instead of one rent line.

Does IFRS 16 change my taxable income?

It changes the timing and the description of the charge, not the total over the lease. Taxable income starts from accounting income under Article 20, so the IFRS 16 charges are the starting point. Over the full lease term, the total deducted equals the total rent paid.

Is lease interest treated as interest for the AED 12 million rule?

Yes. Article 5 of Ministerial Decision No. 126 of 2023 treats the finance element of finance and non-finance lease payments as Interest. The FTA Interest Deduction Limitation guide confirms this for a lessee with a right-of-use asset. The limitation applies only where net interest expenditure for the tax period exceeds AED 12,000,000.

Is depreciation of the right-of-use asset deductible?

Depreciation of capital assets is deductible as an accounting charge under the Determination of Taxable Income guide, subject to the rule in Article 7 of Ministerial Decision No. 134 of 2023 that no depreciation is allowed on capitalised costs that would not have been deductible if expensed.

What about short-term and low-value leases?

IFRS 16 allows a lessee to expense payments on short-term leases (12 months or less) and low-value assets instead of recognising a right-of-use asset. Where the accounts do this, the payments are charged to profit and there is no lease interest to count. The tax result follows the accounting policy.

Can I deduct rent paid to the company owner or a director?

Only to the extent it corresponds with Market Value and is for the business. Article 36 of the Decree-Law applies to payments to Connected Persons, which include owners, directors and officers and their Related Parties. Keep comparable market rents on file.

What happens if the lease is changed or ended early?

A modification means the accounting balances are remeasured, and for interest limitation purposes Article 5(5) of Ministerial Decision No. 126 of 2023 requires the finance element to be recalculated as if a new lease had been entered into at the amendment date. A gain or loss on early termination recorded in the accounts flows into taxable income unless the law adjusts it.

Is rent paid in advance deductible this year?

Only the part that relates to the current tax period, under accrual accounting. The remainder is a prepayment carried to the next period. A refundable security deposit is not an expense at all.

Do I need Ejari or Tawtheeq to claim the deduction?

The Decree-Law and the FTA guides we reviewed do not make registration a condition of deduction. A registered contract is strong evidence of the landlord, premises, term and rent, so keeping it is sensible.

How long must I keep lease records?

Seven years following the end of the tax period they relate to, under Article 56 of the Decree-Law. Keep the lease, amendments, payment proof and lease schedule together.

If your company is weighing whether to keep leasing premises or buy its own, this guide to buying an office in Dubai and what buyers must check covers the purchase side of that decision.

Do free zone companies follow the same lease rules?

They start from accounting income in the same way. A Qualifying Free Zone Person with both qualifying and non-qualifying income should allocate shared premises costs on a fair and reasonable basis under Article 28(3).

Need Help With Your Lease Accounting and Corporate Tax Return?

If you want a second opinion on how your leases are treated in your accounts and your Corporate Tax computation, message Qaspro Global on WhatsApp: https://wa.me/971551539679.

Sources: Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Articles 20, 28, 29, 30, 34, 36 and 56), UAE Ministry of Finance; Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule (Articles 5 and 8); FTA Corporate Tax Guide, Interest Deduction Limitation Rules (CTGIDL1), section 3.5 and Example 10; FTA Corporate Tax Guide, Determination of Taxable Income (CTGDTI1); Ministerial Decision No. 134 of 2023 as described in that guide. The worked example uses illustrative figures. This guide is general information, not tax advice for your specific facts.

Written by Muhammad Qasim FCCA
Founder & CEO, Qaspro Global — UAE tax expert with 16+ years of experience in VAT, corporate tax and FTA audit support.

UAE Corporate Tax on Leases and Rent Expense 2026: Right-of-Use Assets, Lease Liabilities and What a Tenant Company Can Deduct