Introduction
Interest expenditure is a routine cost for many businesses. However, when it comes to UAE Corporate Tax, deducting such interest isn’t as straightforward. The Federal Tax Authority (FTA) UAE has issued detailed guidance to ensure that interest deductions do not result in base erosion or profit shifting. In this blog, we simplify the Interest Deduction Limitation Rules and help you understand when, how, and to what extent interest expenses are deductible.
The Purpose Behind UAE Corporate Tax Interest Deduction Rules
Interest is a common feature in modern business financing, but it can also be exploited to artificially shift profits out of a tax jurisdiction. The Interest Deduction Limitation Rules (IDLR) exist to ensure that UAE’s tax base is protected from such erosion.
These rules are divided into:
- General Interest Deduction Limitation Rule (GIDLR) – a quantitative cap on net interest deductions.
- Specific Interest Deduction Limitation Rule (SIDLR) – an anti-avoidance provision targeting arrangements with a tax avoidance purpose.
- General Interest Deduction Limitation Rule (GIDLR) – a quantitative cap on net interest deductions.
Together, they form a robust framework to regulate interest deductibility.
What Counts as “Interest” under UAE Corporate Tax?
Under the Corporate Tax Law, “Interest” is defined broadly and goes beyond traditional loan interest. It includes:
- Amounts paid or accrued for the use of money or credit.
- Discounts and premiums on debt instruments
- Profit elements in Islamic finance (e.g., from Mudarabah, Ijara, or Sukuk)
- Payments economically equivalent to interest (e.g., factoring charges, repo costs)
- Certain finance-related fees (e.g., guarantee fees, loan processing costs)
The intent is to catch all forms of finance costs, ensuring businesses don’t avoid tax by disguising interest as something else.
When Is Interest Deductible?
Not all interest qualifies for deduction under the UAE Corporate Tax Interest Deduction rules. For any interest expense to be deductible, it must meet general conditions:
- Incurred wholly and exclusively for the business.
- Not capital in nature, unless capitalised under accounting standards.
- Not related to earning exempt income (e.g., dividends under the Participation Exemption).
- If paid to Connected Persons, it must satisfy the Arm’s Length Principle and be properly documented.
- Incurred wholly and exclusively for the business.
Specific Interest Deduction Limitation Rule (SIDLR)
This rule targets artificial debt arrangements, especially those designed to shift profits to low- or no-tax jurisdictions.
Key Features:
- Applies where the main purpose of a transaction is to gain a corporate tax advantage.
- Presumes non-resident debt arrangements may trigger restrictions. Disallows deductions in suspicious cross-border related-party scenarios.
General Interest Deduction Limitation Rule (GIDLR)
This is the cornerstone limitation for most UAE businesses.
How it Works:
- Only 30% of adjusted EBITDA can be used to deduct net interest expenditure.
- Net interest expenditure = Interest expense – Interest income.
- Adjusted EBITDA = Accounting EBITDA, adjusted for exempt income and disallowed expenses.
Carry Forward: Any excess (disallowed) net interest can be carried forward for up to 10 tax periods.
The De Minimis Threshold – AED 12 Million
Before applying the 30% cap, the law offers a relief threshold of AED 12 million of net interest expenditure per tax period. If your business’s net interest expense is AED 12 million or less, the entire amount is fully deductible, and the 30% adjusted EBITDA cap does not apply.
Exceptions:
- Banks and insurance providers
- Natural persons conducting business
- Qualifying infrastructure projects
- Historical Financial Liabilities (debt instruments or liabilities with terms agreed upon before 9 December 2022)
- Small businesses availing Small Business Relief
- Banks and insurance providers
Special Cases in UAE Corporate Tax Interest Deduction
While the General and Specific UAE Corporate Tax Interest Deduction Limitation Rules apply broadly, the Corporate Tax framework recognises that certain types of entities or scenarios require distinct treatment. As such, the FTA outlines special considerations for:
Exempt Persons
Entities that are exempt from Corporate Tax (e.g., qualifying public benefit entities, pension funds, government-controlled entities) are not subject to the interest limitation rules because no tax liability arises in the first place. However, if such entities have non-exempt income, only the portion attributable to non-exempt activities will need to be assessed under IDLR.
Non-Resident Persons
A Non-Resident Person may be subject to UAE Corporate Tax if they have:
- Taxable Income attributable to its Permanent Establishment in the UAE,
- Taxable Income that is attributable to its nexus in the UAE, and
- State Sourced Income that is not attributable to its Permanent Establishment in the UAE.
In such cases:
- The General Interest Deduction Limitation Rule applies when calculating the Taxable Income attributable to a UAE Permanent Establishment or nexus but does not apply in the determination of State Sourced Income.
- If a PE ceases to exist or its UAE nexus is “interrupted”, Unutilised Net Interest Expenditure is forfeited upon de-registration due to cessation of business activity. This forfeiture applies even if a Non-Resident Person subsequently re-establishes a Permanent Establishment or nexus in the UAE.
Cash Basis of Accounting
Businesses that are eligible (and have elected) to use the cash basis of accounting—typically those with annual revenue ≤ AED 3 million—will apply the interest deduction rules based on actual payments, not accruals.
This means:
- Interest is deductible only when paid (not when accrued).
- The de minimis threshold and EBITDA test still apply, but on cash-paid amounts.
Capitalised Interest and Amortisation
Where interest is capitalised (e.g., during construction of an asset), it is not immediately deductible. Instead, the capitalised interest:
- Is amortised over the useful life of the asset.
- The annual amortised capitalised interest portion is treated as interest expense.
- Depreciation relating to capitalised interest must be excluded from EBITDA when computing the 30% threshold.
If the asset is disposed before full amortisation, the unclaimed balance becomes deductible in the year of disposal.
Need Help?
At RVG Chartered Accountants, we assist businesses in navigating UAE Corporate Tax compliance with precision—from interpreting UAE Corporate Tax Interest Deduction rules to optimising overall tax positions.
Get in touch today for a personalised consultation.
