Interest Deduction Rule UAE

Under UAE Corporate Tax Law, the general interest deduction rule limits the amount of interest expense a taxable person can claim as a deduction in order to prevent excessive debt financing and profit shifting. A business can deduct its net interest expense (i.e., interest expense minus interest income), but this deduction is generally restricted to 30% of tax-adjusted EBITDA, which is calculated based on taxable income with adjustments for interest, depreciation, and amortisation.

At the same time, the law provides a significant relief through a de minimis threshold of AED 12 million, whereby if the net interest expense does not exceed this amount, the entire interest becomes fully deductible without applying the 30% limitation. This makes the rule less burdensome for small and medium-sized businesses.

If the net interest expense exceeds the allowable limit, the excess portion is not permanently disallowed; instead, it can be carried forward for up to 10 years and deducted in future periods, subject to certain conditions such as continuity of the business. Additionally, the interest must satisfy the general deductibility condition of being incurred wholly and exclusively for business purposes and must comply with transfer pricing rules, ensuring that related-party transactions are at arm’s length.

Further, anti-abuse provisions may restrict deductions where the borrowing is used for non-business purposes, such as funding dividends or certain intra-group investments. The rule generally applies to both related-party and third-party debt, but it does not apply to certain sectors like banks, insurance companies, and extractive businesses. Overall, this provision aligns the UAE with international tax standards while maintaining a balanced and business-friendly approach.

What Counts as "Interest"?

The definition under UAE CT is broad and focuses on the economic substance of the transaction rather than its accounting classification under IFRS. It includes:

• Any amount accrued or paid for the use of money or credit.
• Discounts and premiums linked to the borrowing of money or debt issuance (excluding trade discounts or early payment incentives for sales).
• Islamic Financial Instruments (e.g., Murabaha, Mudarabah, Sukuk) where "profit" or "markup" acts as the economic equivalent of interest.
• Finance elements of lease payments and foreign exchange gains/losses directly arising from interest.
• Finance-raising costs such as arrangement fees, guarantee fees, commitment fees, and legal/professional costs associated with securing loans.

Note on Capitalized Interest: Interest capitalized into the cost of an asset is not immediately deductible. It is factored into the Net Interest Expenditure sequentially over the asset's useful life via its depreciation/amortization cycle.

What is the Rule All About?

At its core, the rule limits the amount of Net Interest Expenditure that a business can deduct in a given Tax Period.

Net Interest Expenditure =

Interest Expense (including carried forward amounts) – Interest Income

This ensures that only the actual net cost of borrowing is considered for deduction.

However, not all interest is treated equally. The law excludes:

• Interest disallowed under other provisions (e.g., non-arm’s length related party transactions)
• Interest on grandfathered loans (before 9 December 2022)
• Interest related to Qualifying Infrastructure Projects

🧮 Understanding Adjusted EBITDA

The calculation of Adjusted EBITDA is critical and slightly nuanced.
It starts with Taxable Income, which is then adjusted by:

Add-backs:
• Net Interest Expenditure (current period only)
• Depreciation & Amortisation
Exclusions:
• Interest relating to pre-9 Dec 2022 financial instruments
• Interest linked to Qualifying Infrastructure Projects
Special Notes:
• For Tax Groups, income/expenses of banks and insurance entities are excluded
• If EBITDA turns negative → it is treated as zero

🔁 Carry Forward Mechanism – A Key Relief

One of the most practical features of this rule is the ability to carry forward disallowed interest:

• 10-Year Carry Forward: Disallowed net interest expenditure can be carried forward and deducted in the subsequent 10 tax periods.
• FIFO Rule: When utilizing carried-forward interest, businesses must follow a First-In, First-Out (FIFO) approach. Brought-forward disallowed interest from earlier years must be deducted to the maximum extent permissible before deducting the current period's interest expenses. Must follow FIFO (First-In-First-Out) utilization
• Subject to meeting conditions in future years

👉 Then no restriction applies, and the full interest is deductible.

Key Exemptions from the Rule

The GIDLR does not apply uniformly across all entities. The following are completely excluded from the interest capping rules:

• Financial Institutions: Banks and Insurance Providers.
• Natural Persons: Individuals conducting business activities in the UAE.
• Qualifying Infrastructure Projects (QIP): Public-benefit infrastructure projects meeting specific territorial and sector criteria (e.g., utilities, transport, education, healthcare).
• Small Business Relief: Businesses electing for Small Business Relief (available for revenue below the designated thresholds).

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