As the UAE’s Corporate Tax regime continues to take shape, businesses must stay informed about how specific expenses are treated especially interest expenses, which can be both common and complex.
The Federal Tax Authority (FTA) has issued clear guidance on how interest costs are handled under the new framework, including limitations for high levels of debt and restrictions on related-party transactions. Here’s a breakdown of what you need to know.
General Interest Deduction Limitation Rule (Article 30)
Under Article 30 of the Corporate Tax Law, net interest expense is subject to a limitation if it exceeds AED 12 million in a given tax period.
Key Points:
- Deductible interest is capped at 30% of adjusted EBITDA
- Any excess interest may be carried forward indefinitely, provided it isn’t disallowed under other rules
- Applies to net interest (i.e., interest expense minus interest income)
This rule is designed to limit base erosion via excessive debt financing, aligning UAE tax policy with global best practices.
What Qualifies as “Interest”?
The definition of interest under UAE tax law is broad and includes a wide array of financing costs, such as:
- Traditional and Islamic financing arrangements
- Interest on bonds (including discounts/premiums)
- Repo and securitisation financing costs
- Factoring and stock lending costs
- FX gains/losses linked to interest
- Capitalised interest (spread across the life of an asset)
- Implied interest in lease and hire purchase agreements
Who’s Exempt from Article 30?
Certain entities and situations are exempt from the general interest limitation rule:
- Banks and insurance businesses
- Natural persons conducting business directly
- Loans entered into before 9 December 2022 (if terms remain unchanged)
- Qualifying infrastructure projects
Specific Interest Deduction Limitation Rule (Article 31)
This provision targets related-party financing. Under Article 31, interest deductions are disallowed if the borrowed funds are used to:
- Pay dividends
- Repurchase company shares
- Make capital contributions
- Acquire interests in related entities
If the main purpose of the transaction is to gain a Corporate Tax advantage, the interest will not be deductible even if the transaction is otherwise legitimate.
This rule prevents the misuse of inter-company loans and is closely aligned with anti-avoidance principles.
Small Business Relief and Interest Deduction
Businesses that qualify for Small Business Relief under Section 8.6 may benefit from a simplified tax regime including exemption from Corporate Tax but with some trade-offs.
Eligibility:
- Revenue does not exceed AED 3 million in the current and past tax periods
- Must be a Resident Person
- Cannot be part of a Multinational Enterprise Group or a Free Zone Qualifying Person
Benefits:
- Treated as having 0% taxable income
- Exempt from:
- Transfer pricing documentation
- Complex calculations
- Interest limitation rules
- May use cash basis accounting
Limitations:
- The election must be made annually
- Cannot claim:
- Tax losses
- Excess interest deductions
- Group or restructuring relief
- Once revenue exceeds the AED 3 million threshold, relief cannot be re-elected in future years
Need Guidance on Interest Deduction Rules?
Understanding how interest costs are treated under UAE Corporate Tax can have a significant impact on your business’s financial planning and compliance. Whether you’re dealing with related-party loans, capitalised finance costs, or exploring Small Business Relief, the team at CRESCO Accounting is here to help.
Contact us today to assess how these rules may apply to your business and develop a strategy that aligns with your growth goals.
