UAE Corporate Tax: Is a Parent-Granted ESOP Cost Deductible in the Subsidiary?

Created By : Yeeshu Sehgal | UAE Tax Lead

A UAE subsidiary books an AED 800,000 staff cost for share options its overseas parent granted to the subsidiary’s own employees. No cash leaves the subsidiary – the matching entry sits in equity. Does the charge reduce taxable profit like any salary? It can, but the answer turns on facts how the group structures the arrangement. UAE guidance does not yet address share-based payments, so the position rests on the general rules and how comparable regimes have ruled.

Why the charge appears in the accounts

Under IFRS 2, a company that receives employee services paid for in shares recognises their cost even when another group company issues the shares. The UAE subsidiary therefore expenses the options’ fair value over the vesting period, with the credit taken to equity as a capital contribution from the parent – a real P&L charge but, absent a recharge, no cash outflow.

The UAE position

Taxable income starts from IFRS accounting income (Article 20(1), read with Ministerial Decision No. 114 of 2023). The IFRS 2 charge is already inside that figure and stays deductible unless a provision adds it back or it fails the Article 28 test – incurred wholly and exclusively for the business and not capital in nature. Neither Article 20(2) nor the Article 33 non-deductible list mentions share-based payments. The same reading holds in comparable regimes that build taxable profit from the accounts, where the IFRS 2 charge on a subsidiary's own employees has been allowed as a deductible cost on near-identical facts.

The counter-argument: the credit is to equity, not a payable, so the FTA could say the subsidiary has parted with nothing (no real outlay), or that the charge is the flip side of a capital contribution and therefore capital in nature – a challenge that is sharpest where no recharge exists and the dilution economically falls on the parent's shareholders.

What’s at stake – a worked example

Take a subsidiary with AED 2,000,000 of accounting profit (already after the AED 800,000 ESOP charge). Whether the charge is allowed swings the corporate tax by AED 72,000:

*First AED 375,000 of taxable income is taxed at 0%; the ESOP charge is relieved at the 9% margin, so the swing is 9% × AED 800,000 = AED 72,000.

The recharge is the deciding fact

A recharge does not change the AED 800,000 already in the accounts – it changes which column you land in. With no recharge, the deduction rests on the accounting-profit argument alone and carries the objections above. With a recharge, the subsidiary actually pays for the benefit its employees received, turning a book entry into a genuine, documented cost. The trade-off: the recharge is a related-party transaction that must be priced at arm’s length with transfer pricing support under Article 34, and its amount and timing should track the IFRS 2 charge to avoid book-to-tax mismatches.

What to do

Put a recharge agreement in place before awards vest and price it at arm’s length with TP support. Keep the option valuation, the IFRS 2 workings and the recharge reconciliation on one file. Test the capital-versus-revenue characterisation for each plan rather than assuming it, and revisit any position taken while UAE guidance is silent once the FTA addresses share-based payments.

How we can help

AKM Global can review how your ESOP charge is recognised under IFRS 2, assess its deductibility against Articles 20, 28 and 33, and design and document an arm’s-length recharge under Article 34 – reconciling the accounting charge to the amount claimed and assembling the supporting file the FTA would expect to see.