Deduction of expenses is allowed under the Act if it is incurred solely and exclusively for the purpose of business, and the transaction is based on the arm's length principle. Arm's length principle, as defined under the Act, means transactions are at prevailing market conditions, and there is no conflict of interest.

The following key expense types are not deductible or have limited deductibility for Bhutan tax purposes:

Personal expenses are not deductible;
Payments of dividend or profit distributions to shareholders, partners, and proprietors are not deductible;
Creation of or adjustments in relation to reserves are not deductible;
Bad debts/advances (except for financial institutions) non-fulfilling specified conditions are not deductible;
Life insurance premiums and health insurance premiums, except for schemes approved by the Royal Government of Bhutan, are not deductible;
Business Income Tax, Corporate Income Tax, and Personal Income Tax are not deductible;
Penalties, fines, penal interest, forfeiture, etc. are not deductible;
Donations other than those authorized by the Ministry are not deductible;
Interest on loans from private sources, on loans taken to pay dividends are not deductible;
Entertainment expenses on sales promotion of business in excess of 2% of net assessed profits are not deductible;
Entertainment expenses incurred by tour operators in excess of 8% of net assessed profits (5% until 31 December 2019) are not deductible; and
Publicity and advertisement expenses in excess of 5% of assessed gross income (2% until 31 December 2019) are not deductible.

COVID-19 Emergency Measures

In response to the COVID-19 pandemic, Bhutan has notified that the interest waived on loans granted under Druk Gyalpo's Relief Kidu (DGRK) is not a deductible expense for tax purposes when filing tax returns, subject to certain conditions.

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