Overview

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses was issued on 3 October 2022 and was published in Issue #737 of the Official Gazette of the United Arab Emirates (“UAE”) on 10 October 2022. This Decree-Law together with its amendments is referred to as the “Corporate Tax Law”.

The Corporate Tax Law provides the legislative basis for imposing a federal tax on corporations and Business profits (“Corporate Tax”) in the UAE.

The provisions of the Corporate Tax Law shall apply to Tax Periods commencing on or after 1 June 2023.

Purpose of this guide

This guide is designed to provide general guidance on the deductibility of Interest expenditure while calculating the Taxable Income of a Taxable Person. The guide elaborates on the following aspects:

• Meaning of Interest under the Corporate Tax Law,

• Application of the General Interest Deduction Limitation Rule and Specific Interest Deduction Limitation Rule,

• Carry forward and utilisation of disallowed Net Interest Expenditure, and

• Interaction of the Interest limitation rules with other provisions of the UAE Corporate Tax Law.

Who should read this guide?

The guide should be read by any Taxable Person that conducts Business in the UAE and incurs Interest expenditure. This guide explains the deductibility of Interest expenditure while calculating the Taxable Income of a Taxable Person who is not part of a Tax Group^[1]. It is intended to be read in conjunction with the Corporate Tax Law, the implementing decisions and other relevant guidance published by the FTA.

How to use this guide

The relevant articles of the Corporate Tax Law and the implementing decisions are indicated in each section of the guide.

It is recommended that the guide is read in its entirety to provide a complete understanding of the definitions and interactions of the different rules. Further guidance on some of the areas covered in this guide can be found in other topic- specific guides.

In some instances, simple examples are used to illustrate how key elements of the Corporate Tax Law apply to deductibility of Interest. The examples in the guide:

• Show how these elements operate in isolation and do not show the interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal or tax advice purposes; and

• Are only meant for providing the readers with general information on the subject matter of this guide. They are exclusively intended to explain the rules related to the subject matter of this guide and do not relate at all to the tax or legal position of any specific juridical or natural persons.

Legislative references

In this guide, the following legislation will be referred to as follows:

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and its amendments, is referred to as “Corporate Tax Law”,

• Cabinet Decision No. 56 of 2023 on Determination of a Non-Resident Person’s Nexus in the State for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Cabinet Decision No. 56 of 2023”,

• Ministerial Decision No. 43 of 2023 Concerning Exception from Tax Registration for the Purpose of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 43 of 2023”,

• Ministerial Decision No. 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, is referred to as “Ministerial Decision No. 73 of 2023”,

• Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 126 of 2023”, and

• Ministerial Decision No. 134 of 2023 on the General Rules for Determining Taxable Income for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 134 of 2023”.

Status of this guide

This guidance is not a legally binding document but is intended to provide assistance in understanding the tax implications for Interest expenditure under the Corporate Tax regime in the UAE. The information provided in this guide should not be interpreted as legal or tax advice. It is not meant to be comprehensive and does not provide a definitive answer in every case. It is based on the legislation as it stood when the guide was published. Each Person’s own specific circumstances should be considered.

The Corporate Tax Law, the implementing decisions and the guidance materials referred to in this document will set out the principles and rules that govern the application of Corporate Tax. Nothing in this publication modifies or is intended to modify the requirements of any legislation.

This document is subject to change without notice.

Overview

Interest, a common Business expenditure, is generally allowed as a deduction while calculating a Taxable Person’s Taxable Income for a Tax Period. However, the deductibility of interest for Corporate Tax purposes is not without limits. It includes interest income and interest expenditure that typically represents amounts paid for use of money or credit, and other associated costs. This is subject to various Corporate Tax provisions, applied in the following order:

1. General principles of deductibility of expenditure (Section 4.1),

2. Arm’s Length Principle (Section 4.3),

3. Specific Interest Deduction Limitation Rule (Section 5), and

4. General Interest Deduction Limitation Rule (Section 6).

The purpose of the Specific Interest Deduction Limitation Rule and General Interest Deduction Limitation Rule (together referred as “Interest limitation rules”) is to ensure that the tax deduction for Interest expenditure does not result in the erosion of the UAE’s tax base and shifting of profits away from the UAE.

The General Interest Deduction Limitation Rule does not apply to certain categories of persons, including Banks, Insurance Providers and natural persons doing business in the UAE (see Section 7).

Amount accrued or paid for use of money or credit

Interest may be charged as a result of borrowing funds or receiving credit. It is the additional amount that a borrower pays to a lender on top of the repayment of principal (the underlying amount borrowed/owed).

Any amounts which are accrued or paid for the use of money or credit are economically equivalent to Interest, and will be considered to be Interest (see Section 3.5).

Discounts and premiums

Discounts and premiums are treated as Interest when they are related to the borrowing of money or the issuance of debt instruments because they represent the cost of borrowing or return on lending.

When a bond or debt instrument is issued at a price lower than its face value, the difference between the issue price and the face value is known as a “discount”. This may occur where the bond pays no interest (zero coupon) or the interest rate is below the market rate. This discount (which may be amortised over the term of the debt instrument) is treated as Interest. For example, a company issues a bond with a face value of AED 10,000 at a price of AED 9,500. The discount of AED 500 (which may be amortised over the term of the debt instrument) is considered to be Interest income for the lender (the holder) and Interest expenditure for the borrower (the issuer).

When a bond or debt instrument is issued for more than its face value, the excess amount is referred to as a “premium”. This may occur where the bond pays a rate of Interest higher than the prevailing market rate. This premium (which may be amortised over the term of the debt instrument) is considered to represent the lender’s reward for the loan of money and is, therefore, treated as Interest.

For example, a bond with a face value of AED 10,000 is subscribed at a market price of AED 10,200. The issuer (the borrower) must pay back AED 10,000 to the holder (the lender) being the face value of the bond. For the holder (the lender), the AED 200 premium is typically amortised and recognised in the income statement over the term of the bond, which will be treated as Interest expenditure whereas for the issuer (the borrower), the AED 200 is amortised over the term of the bond as a reduction to its Interest expenditure (i.e. it is considered as Interest income).

Discounts provided as sales incentives or for early payment are not considered Interest, as they are not related to the financing or borrowing of money. Other examples of discounts and premium that are not considered to be Interest include:

• Trade discounts: reductions from the list price of goods or services offered by sellers, for instance to preferred customers.

• Volume discounts: offered to customers for purchasing in large quantities.

• Sales promotions and rebates: reductions in the selling price of goods or services as part of promotional campaigns or as retrospective discounts.

• Premium or discount on issuance of equity instruments: arising when equity instruments are issued at a price above or below their face value.

• Loyalty Points or Rewards: discounts or benefits given to reward customer loyalty.

Payments made in respect of Islamic Financial Instruments

Islamic Financial Instruments^[5] are designed to facilitate financial transactions, while adhering to Sharia principles, which prohibit Interest. Common examples of Islamic financing structures used to offer sharia-compliant products are Mudarabah, Murabaha, Ijara, Sukuk, etc.

Such instruments typically contain an element (such as “profit” or “mark-up”) that is considered to be economically equivalent to Interest, regardless of the classification and treatment of the element under IFRS (or IFRS for SMEs).^[6]

An Islamic Financial Instrument (or a combination of arrangements that form part of the same Islamic Financial Instrument) that is classified as an ownership interest under the Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) is not considered to have an Interest element.

Accordingly, in order to determine how these Islamic Financial Instruments should be treated for Corporate Tax purposes, it is necessary to understand how these instruments have been treated as per IFRS. For example, if the instrument is recognised as a debt instrument in accordance with IFRS, the corresponding profit distribution should be considered as equivalent to Interest for the purposes of the Interest limitation rules. Conversely, if the instrument is not classified as a debt instrument under IFRS, there would be no Interest equivalent element. For example, a profit distribution in respect of an instrument that is recognised as a debt in accordance with IFRS, such profit distribution should be considered as equivalent to Interest for the purposes of the Interest limitation rules.

Below are examples of Islamic Financial Instruments and the corresponding Interest equivalent element (assuming they are classified as a debt instrument under IFRS).

• A Mudarabah is a contractual relationship executed between two parties, one supplying the capital and the other supplying the labour and skill as an agent or manager, for investment purposes. Each party is granted a ratio of any earnings, determined at the time of making the investment. Such earnings would be typically treated as Interest equivalent for Corporate Tax purposes.

• In a Murabaha cost-plus financing structure, a bank purchases an asset and sells it to the borrower at an agreed price (including an agreed upon mark-up) on a deferred payment basis. The payments (which consist of principal plus mark-up) are paid by the borrower in instalments or a lump sum on an agreed future date or dates. The mark-up charged by the bank may be considered as Interest for Corporate Tax purposes.

• Ijara or Islamic leasing, is a Shariah-compliant financial structure where the lessor (financier) leases an asset to the lessee (borrower) for a specified period in exchange for rental payments. The ownership of the asset remains with the lessor, who also bears the risks associated with ownership, such as maintenance and insurance. Generally, in asset-based financing, the ownership of the asset is eventually transferred to the lessee at the end of the lease term, often for a nominal or minimal payment. The rental payments made by the lessee to the lessor can be fixed or variable, often linked to a benchmark rate, allowing for flexibility in adjusting payments over time. The rental payments include both a profit and principal element. The profit element may be considered as akin to Interest for Corporate Tax purposes (after adjustment for implied maintenance charges for the asset (if any)).

• As an alternative to conventional bonds, investors in a Sukuk (for example, a typical Murabaha-based Sukuk) may receive periodic distributions of profits as per the agreed mark-up. The mark-up element is typically considered as akin to Interest. In other structures, instead of fixed distribution payments, investors may receive income from a “right of use” asset, which may be considered to be equivalent to an Interest-like element.

• Sukuk can also be issued under other Islamic structures such as Ijara. The specific structure and its terms need to be assessed to determine if there is an element that can be considered as akin to Interest for Corporate Tax purposes.

• In a Istisna the financer or investor (typically a Bank) enters into a contract to facilitate in the construction of an asset. They agree to deliver the asset at a future date for a pre-agreed price, which can be paid in instalments or as a lump sum upon completion that includes a margin or mark-up. The profit margin or mark-up included in the price may be considered as Interest for Corporate Tax purposes.

• A Salam contract is in the nature of a forward contract that includes goods or products (typically agricultural products) where delivery is at a later date and with a pre-agreed mark-up. The profit margin or mark-up included in the price may be considered as Interest for Corporate Tax purposes.

Payments economically equivalent to Interest

The concept of "payments economically equivalent to Interest" encompasses a wide array of financial charges that, although not explicitly labelled as Interest, fulfil a similar economic role. These payments may occur within transactions or arrangements where the term 'Interest' has not been used but the economic substance of the transactions or arrangements are similar to a loan on which Interest should be charged.

When determining whether a payment is economically equivalent to Interest, it is essential to consider whether the economic substance provides financial returns that are akin to debt or equity. This substance may not necessarily follow the treatment under applicable Accounting Standards.

Foreign exchange movements

Foreign exchange movement refers to the change in the value of one currency relative to another. These movements can result in gains or losses when a Business has assets, liabilities, income, or expenses denominated in a foreign currency.

Any foreign exchange gains or losses that are related to Interest or other payments economically equivalent to interest are considered to be Interest.^[22] However, foreign exchange gains or losses arising from the principal portion of the loan (as distinct from interest on the loan) is not considered to be Interest. Similarly, foreign exchange gains and losses on other Business arrangements or transactions that are not related to Interest, for example, on the sale of finished products or the purchase of raw materials, should not be considered as Interest.

Capitalised Interest

Generally, borrowing costs that are directly attributable to the acquisition, construction or production of an asset are capitalised based on IFRS (or IFRS for SMEs). Where capitalisation is appropriate, interest, processing fees and any other costs incurred in obtaining a loan to construct a long-term asset is added to the cost base of the asset rather than being immediately expensed in the income statement under IFRS (or IFRS for SMEs).

Capitalised interest is not deductible in the Tax Period in which it is incurred because it is capital in nature.^[23] Instead, it should be treated as part of the cost of the related asset and, therefore, increases the cost base of that asset for depreciation purposes.

Income and expenditure attributable to the capitalised interest amount is subject to the General Interest Deduction Limitation Rule.^[24] Any amount of income and expenditure attributable to capitalised interest in accordance with the Accounting Standards followed by the Taxable Person (i.e. IFRS or IFRS for SMEs) should be treated as part of Net Interest Expenditure in the Tax Period in which the capitalised interest is amortised over the useful life of the related asset, and not in the Tax Period in which the interest is incurred and capitalised.^[25]

Accordingly, where the Taxable Person has capitalised interest in accordance with IFRS (or IFRS for SMEs), the Taxable Person must make the following adjustments when calculating Net Interest Expenditure and adjusted EBITDA:

1. Net Interest Expenditure - the capitalised interest should be spread on a straight- line basis over the useful life of the underlying asset, and the relevant portion for each Tax Period should be included in Net Interest Expenditure.

2. Adjusted EBITDA - to avoid double-counting, the amount of depreciation that is added back when calculating adjusted EBITDA should be reduced by the amount included in Net Interest Expenditure under (a) above because that amount is re- characterised from being depreciation to being Interest in that Tax Period.

If the related asset is disposed of in a Tax Period before the capitalised interest has been fully included in Net Interest Expenditure, the balance of the capitalised interest should be treated as part of Net Interest Expenditure in the Tax Period in which the asset is disposed of.

Hybrid instruments

Hybrid instruments are financial products that combine features of both debt and equity. Hybrid instruments can take various forms. For instance, convertible debentures or bonds are debt instruments that can be converted into equity of the issuing company.

To the extent a hybrid instrument is not converted to equity and not classified as equity under IFRS (or IFRS for SMEs), the income and expenditure in relation to it will be considered as Interest.^[27]

However, if a hybrid instrument is classified as an equity interest under IFRS (or IFRS for SMEs), any income and expenditure in relation to the instrument will not be considered as Interest but instead considered to be a Dividend or other profit distribution.^[28]

For example, profit participating loans or preference shares may be difficult to classify because they can be akin to debt or equity depending on their terms. Where they are classified as a financial liability for accounting purposes, the payments made by the issuer to the holder is considered to be Interest. Where they are classified as an equity instrument for accounting purposes, the payments made by the issuer to the holder is considered to be a Dividend.

Late payments

Amounts incurred in connection with the raising of finance

The term "amounts incurred in connection with raising finance" refers to the various costs that a Business may incur when obtaining capital through borrowing or other financial instruments (other than equity instruments). These costs are considered to be Interest.^[30]

Even if the amounts are capitalised as part of the cost of the asset under IFRS (or IFRS for SMEs), the capitalised amounts would still be treated as Interest (see Section 3.7).

The broad definition ensures that all forms of compensation to creditors or costs related to financing are captured, regardless of how they are structured or named. This includes but is not limited to:^[31]

• Guarantee fees:When a company seeks a loan, it might require a Related Party or third-party guarantee to assure the lender of repayment. A fee charged by a guarantor for this would be considered an amount incurred in raising finance.^[32] Where a Related Party does not charge a guarantee fee but a fee would be charged on an arm’s length basis (i.e. under transfer pricing rules), such a deemed fee would also be considered as Interest. For example, if a company borrows AED 10 million and the Bank requires a guarantee from a guarantor, a guarantee fee of 1% would be AED 100,000. This fee will be treated as Interest expenditure for the borrowing company and Interest income for the Related Party guarantor.

• Arrangement fees: These are fees charged by financial institutions for setting up a loan or credit facility.^[33] For example, if a company arranges an AED 50 million credit line with a bank, and the bank charges a 0.5% arrangement fee, the company incurs an AED 250,000 fee. This fee is treated as Interest expenditure for the company.

• Commitment fees: These fees are charged by lenders for agreeing to provide a loan or credit facility, even if the borrower does not draw down the loan.^[34] For example, if a company has an undrawn credit facility of AED 20 million with a commitment fee of 0.25% per annum, it will incur an AED 50,000 annual fee, which is treated as Interest expenditure.

Any other fees that are similar in nature to the above-mentioned fees should also be treated as “amounts incurred in connection with raising finance” and, hence, Interest.^[35] Examples include:

• Underwriting fees: When a company issues bonds or other debt securities, it may use an underwriter to guarantee a certain price for the securities to investors. The underwriter may charge a fee for this service, which is an amount incurred in connection with raising finance. For example, if a company issues bonds (a debt instrument) worth AED 50 million and the underwriting fee is 2%, the company would incur an AED 1 million fee which should be treated as Interest expenditure.

• Legal and professional fees: The costs of legal advice, accounting services, and other professional fees directly related to the structuring and negotiation of financing are also considered amounts incurred in connection with raising finance. For example, if a company incurs AED 200,000 in legal fees to document and close a syndicated loan transaction, these fees should be treated as Interest expenditure.

• Early or pre-payment of loan: Pre-payment charges, pre-payment penalties or break costs are fees that lenders charge to compensate for the loss of expected income due to a loan being paid off before its maturity date. The penalty is directly related to the cost of borrowing and arises from the financing agreement between the borrower and the lender and hence is an amount incurred in connection with raising finance. Such pre-payment charges, if incurred by a company, should be treated as Interest expenditure.

Disposal, sale or transfer

Where a debt instrument is disposed, sold or transferred, it may result in a gain or loss. Such gain or loss is considered as Interest to the extent it is treated as interest or other financing amount under IFRS (or IFRS for SMEs).

For example, a company that has invested in interest-bearing corporate bonds decides to sell these bonds before they mature. It realises a loss and records all of this as a loss on disposal of financial assets (not interest expense). Accordingly, no element of this loss is treated as Interest. However, that loss is included in Accounting Income and, therefore, brought into the Taxable Income calculation.^[37]

Another example would be where a real estate company sells a property for an agreed sale price of AED 1 million. Instead of the buyer paying for the property in one lump sum, however, the company agrees that the buyer can pay for the property in six instalment payments of AED 200,000 over two years. The total amount received is, therefore, AED 1.2 million. The additional AED 200,000 over the sale price is recorded as Interest income for the real estate company. Each instalment payment would have an Interest element of AED 33,333 (being AED 200,000 / 6).

Overview

As stated above in Section 3.1, deductibility of Interest is subject to various Corporate Tax rules. These Corporate Tax rules should be applied in the following order:

1. General principles of deductibility of expenditure (Section 4.2),

2. Arm’s Length Principle (Section 4.3),

3. Specific Interest Deduction Limitation Rule (Section 5), and

4. General Interest Deduction Limitation Rule (Section 6).

The General Interest Deduction Limitation Rule must be applied after all the Corporate Tax rules, apart from the Tax Loss Provisions.^[38]

Where adjustments are made to accounting or tax figures, for example, due to the General Anti-abuse Rule^[39] applying or following a Tax Audit,^[40] the calculations in respect of the General Interest Deduction Limitation Rule may need to be revised.

General principles of deductibility of expenditure

In general, Business expenditure is allowed as a deduction while calculating the Taxable Income of a Taxable Person if it is incurred wholly and exclusively for the purposes of the Taxable Person's Business and is not capital in nature. Such expenses are deductible in the Tax Period in which they are incurred. What constitutes “expenditure” generally follows the accounting classification and measurement per the Financial Statements that have been prepared in accordance with IFRS (or IFRS for SMEs) and, therefore, the Accounting Income figure within the income statement is the starting point when calculating Taxable Income.^[41]

However, for Corporate Tax purposes, additional rules apply such that expenditure that is recognised as such for accounting purposes may not be deductible when calculating Taxable Income (see Section 4.2.1). Such rules also apply to Interest expenditure.

There are specific adjustments to be made items of expenditure in line with the following rules:^[42]

• Expenditure not incurred for the purposes of the Taxable Person’s Business (see Section 4.2.1),

• Expenditure incurred in deriving Exempt Income, other than certain Interest expenditure (see Section 4.2.1), and

• Losses that are not connected with or arising out of the Taxable Person’s Business.

Interest expenditure due to Connected Persons and/or Related Parties

Any expenditure incurred in relation to transactions or arrangements with Connected Persons is deductible only to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Connected Persons, and where the payment or benefit is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.^[52] Similarly, transactions or arrangements with Related Parties must adhere to the arm's length standard.^[53]

Where the Interest payable to a Related Party or Connected Person is adjusted to meet the arm's length / Market Value requirement, the amount of Interest after the adjustment is taken into account for the purposes of the Interest limitation rules (unless the Interest is already disallowable under another provision of the Corporate Tax Law).^[54]

Overview

The Specific Interest Deduction Limitation Rule is a targeted provision designed to prevent the erosion of the Corporate Tax base. This could be achieved through the use of certain financial transactions between Taxable Persons and their Related Parties. For example, transactions could be carried out for the sole or main purpose of creating deductible Interest expenditure, while the Interest income derived may not be subject to tax.^[56]

This Specific Interest Deduction Limitation Rule applies after the application of the general principles of deductibility for Interest expenditure (see Section Error! Reference source not found. [GTL Notes - We believe that this reference should be to Section 4.2]), including the application of the Arm’s Length Principle^[57] but before the General Interest Deduction Limitation Rule (see Section 6).

Non-deductibility of Interest expenditure

The Specific Interest Deduction Limitation Rule disallows Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:^[58]

• Dividend or profit distribution to a Related Party,

• Redemption, repurchase, reduction or return of share capital to a Related Party,

• Capital contribution to a Related Party, and

• Acquisition of ownership interest in a Person who is or becomes a Related Party after the acquisition.

The reference to “Interest expenditure incurred on a loan” is interpreted widely to include any kind of borrowings, line of credit, bonds or transactions akin to a loan.

However, this is subject to a “main purpose test”.

Main purpose test

The Specific Interest Deduction Limitation Rule is not applicable if the main purpose of obtaining the loan and carrying out one of the transactions listed at Section 5.2 is not to obtain a Corporate Tax advantage.^[59]

A “Corporate Tax advantage” is defined as including, but is not limited to the following:

• A refund or an increased refund of Corporate Tax,

• Avoidance or reduction of Corporate Tax Payable,

• Deferral of a payment of Corporate Tax or advancement of a refund of Corporate Tax, or

• Avoidance of an obligation to deduct or account for Corporate Tax.^[60]

Whether or not the main purpose of a obtaining a loan and carrying out a transaction referred to under Section 5.2 is to gain a Corporate Tax advantage is based on the specific facts and circumstances. The onus is on the Taxable Person to demonstrate that the main purpose is not to gain a Corporate Tax advantage.

Overview

The General Interest Deduction Limitation Rule under the Corporate Tax Law is intended to prevent abuse of debt financing to reduce the Taxable Income base.

The General Interest Deduction Limitation Rule

A Taxable Person’s Net Interest Expenditure is subject to the General Interest Deduction Limitation Rule. The Net Interest Expenditure is the difference between the amount of Interest expenditure incurred (including any carried forward Net Interest Expenditure) and the Interest income derived during a Tax Period.^[62]

When the Net Interest Expenditure exceeds AED 12 million in a Tax Period, the amount of deductible Net Interest Expenditure is the greater of:

• 30% of EBITDA (earnings before the deduction of Interest, tax, depreciation and amortisation) for a Tax Period, calculated as the Taxable Income for the Tax Period with adjustments for (referred to as “adjusted EBITDA”):^[63]

  • Net Interest Expenditure for the relevant Tax Period,

  • Depreciation and amortisation expenditure taken into account in determining the Taxable Income for the relevant Tax Period,

  • Net Interest expenditure relating to historical financial assets or liabilities held prior to 9 December 2022, and

  • Net Interest expenditure relating to Qualifying Infrastructure Projects.

• Or the de minimis threshold of AED 12 million.^[64]

If the relevant Tax Period is more than or less than 12 months, the de minimis threshold of AED 12 million is adjusted in proportion to the length of the Tax Period.

Where the Net Interest Expenditure is less than the higher of 30% of adjusted EBITDA and AED 12 million (as adjusted for a Tax Period of more than or less than 12 months), no adjustment is required under the General Interest Deduction Limitation Rule: the Net Interest Expenditure for the relevant Tax Period will be deductible.^[65]

Any Net Interest Expenditure disallowed in a Tax Period by the General Interest Deduction Limitation Rule can be carried forward and utilised in the subsequent 10 Tax Periods in the order in which it was incurred, under the “first in, first out” principle. This is subject to meeting the conditions of the General Interest Deduction Limitation Rule in the subsequent Tax Period.^[66]

The carried forward Net Interest Expenditure cannot be transferred to or utilised by any other Taxable Person.

Where a Subsidiary with carried forward Net Interest Expenditure joins a Tax Group, the carried forward Net Interest Expenditure can only be utilised against the Taxable Income of the Tax Group that is attributable to the Subsidiary (and not the entire Taxable Income of the Tax Group).

To determine the deductible and non-deductible Net Interest Expenditure, the following components need to be calculated:

• Net Interest Expenditure, and

• 30% of adjusted EBITDA.

Calculation of Net Interest Expenditure

Net Interest Expenditure is the difference between the amount of Interest expenditure incurred (including any carried forward Net Interest Expenditure) and the Interest income. Net Interest Expenditure includes all the components of Interest discussed in Section 3.

However, the following will not be included when calculating the Net Interest Expenditure:

• Interest expenditure that is disallowed under any other provisions of the Corporate Tax Law,^[67] for example, interest paid to Related Parties that exceeds a non-arm's length amounts,^[68] the Specific Interest Deduction Limitation Rule^[69] (see Section 5),

• Interest income or expenditure related to grandfathered debts, i.e. prior to 9 December 2022,^[70] (see Section 8.4) and

• Interest income or expenditure in relation to Qualifying Infrastructure Projects (see Section 8.5).^[71]

• Any income or expenditure of the member of the Tax Group who is a Bank or Insurance Provider, shall be disregarded while calculating the Net Interest Expenditure of the Tax Group (see Section 8.2).^[72]

An illustrative list of the adjustments that may be relevant in calculating the Net Interest Expenditure is as follows:

Calculation of 30% of adjusted EBITDA

The starting point for “adjusted EBITDA” for a Tax Period is the Taxable Income calculated in accordance with the general rules for determining Taxable Income.^[77] All tax adjustments are required to be made to Accounting Income except for adjustments in relation to the General Interest Deduction Limitation Rule itself and Tax Loss relief provisions.

An adjustment is then required for the following items for the relevant Tax Period:^[78]

• Depreciation and amortisation expenditure taken into account in determining the Taxable Income for the relevant Tax Period,

• Net Interest Expenditure for the relevant Tax Period i.e. Interest expenditure less Interest income of the relevant Tax Period (before carried forward Net Interest Expenditure amounts from previous Tax Periods),

• Any Interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022, and

• Any Interest income or expenditure in relation to Qualifying Infrastructure Projects.

Any income or expenditure of the member of the Tax Group who is a Bank or Insurance Provider, shall be disregarded while calculating the EBIDTA of the Tax Group.^[79]

If the adjusted EBITDA results is a negative amount, then the adjusted EBITDA will be AED 0.^[80]

An illustrative list of the adjustments that may be relevant in calculating the adjusted EBITDA is as follows:

Note: Where a Taxable Person has capitalised interest, any interest element included in the depreciation charge must be removed before the deprecation charge is added back to Accounting Income for the purposes of calculating adjusted EBITDA. See Examples 13 to 15 at Section 3.7.

Exempt Persons

Exempt Persons (listed below) are treated as Taxable Persons insofar as they conduct a Business or Business Activity other than the activity that meets the conditions to be exempt:^[90]

• A Government Entity,^[91]

• A Government Controlled Entity,^[92]

• A person engaged in an Extractive Business,^[93] and

• A person engaged in a Non-Extractive Natural Resource Business.^[94]

The Taxable Income of the independent/other Business or Business Activity is determined in accordance with the provisions of the Corporate Tax Law.^[95] This includes the General Interest Deduction Limitation Rule.

Where the Exempt Person incurs Interest expenditure for its exempt Business or Business Activity as well as for an independent/other Business or Business Activity which is taxable, the Interest expenditure will need to be identified and/or apportioned as the case may be between the two.

Where a loan is taken to purchase assets for the Business Activity, i.e. directly identifiable or attributable to the Business which is taxable, the corresponding Interest expenditure is deductible, subject to the General Interest Deduction Limitation Rule.

Where the Interest expenditure is not directly identifiable or attributable to the Business which is taxable, it will need to be apportioned on a “fair and reasonable” basis.^[96] What is fair and reasonable will depend on the facts and circumstances of each case, and may be based on allocation keys such as headcount, floor space, usage, time spent, or any other measurable and reasonable basis.

In the case of Exempt Persons engaged in an Extractive Business and/or Non- Extractive Natural Resource Business, the common expenditures can be apportioned according to the Revenue of each Business in a Tax Period unless a different proportion is defined by the relevant local laws of the respective Emirate for the purpose of calculating the Emirate-level tax payable in respect of the Extractive Business/Non-Extractive Natural Resource Business.^[97]

Any Interest expenditure incurred for the exempt Business or Business Activity is not deductible.^[98]

Non-Resident Persons

Cash Basis of Accounting

Overview

Considering Taxable Persons in different sectors may have different capital needs and risk profiles, the Corporate Tax Law provides an exception to the applicability of the General Interest Deduction Limitation Rule to the following: ^[107]

• Banks,

• Insurance Providers, or

• Natural persons undertaking Business or Business Activity in the UAE,

• Any other Person as may be determined by the Minister (none are currently specified).

This exception does not apply to treasury companies, captive insurance companies or other non-regulated financial entities that carry out quasi-banking or insurance activities, or to investment vehicles whether regulated (for example, by Securities and Commodities Authority (SCA), Dubai International Financial Center (DIFC) or Abu Dhabi Global Market (ADGM)) or not. These entities remain subject to the General Interest Deduction Limitation Rule.

The General Interest Deduction Limitation Rule also does not apply to historical financial assets and liabilities with terms agreed upon before 9 December 2022 (see Section 8.4) and Qualifying Infrastructure Projects (see Section 8.5).

Banks and Insurance Providers

A Bank is a Person licensed in the UAE as a bank or finance institution or an equivalent licensed activity that allows the taking of deposits and the granting of credit as defined in the applicable (non-tax) legislation of the UAE.^[108]

An Insurance Provider is a Person licensed in the UAE that accepts risks by entering into or carrying out contracts of insurance, in both the life and non-life sectors, including contracts of reinsurance and captive insurance, as defined in the applicable (non-tax) legislation of the UAE.^[109]

Banks and Insurance Providers will typically be in a net Interest income position, which is why they are not subject to the General Interest Deduction Limitation Rule,^[110] but the Interest expenditure they incur will still be subject to the other Corporate Tax rules in respect of Interest (Section 4.2).

If a Bank or an Insurance Provider operates within a group that includes other Taxable Persons not classified as a Bank or Insurance Provider, those other Taxable Persons remain subject to the General Interest Deduction Limitation Rule.

Where a member of a Tax Group is a Bank or Insurance Provider that is not subject to the General Interest Deduction Limitation Rule, any Interest income or expenditure of that member is ignored in calculating the total Net Interest Expenditure and adjusted EBITDA of the Tax Group.^[111] For more information see the Corporate Tax Guide on Tax Groups.

Natural person undertaking Business or Business Activity in the UAE

A natural person that undertakes Business or Business Activity in the UAE is not subject to the General Interest Deduction Limitation Rule.^[112] The Business or Business Activity should be conducted directly by the natural person, for instance as a sole establishment.

Where a natural person conducts Business or Business Activity through a juridical person such as a one-person company, the juridical person would be subject to the General Interest Deduction Limitation Rule (unless some other exemption applies).

Historical Financial Liabilities

Net Interest Expenditure in relation to any debt instruments or liabilities with terms agreed upon before 9 December 2022 (“pre-existing debt instruments or liabilities”) is not subject to the General Interest Deduction Limitation Rule. This includes contracts entered into either before or after 9 December 2022 if their sole purpose was to hedge against interest rate risk.^[113]

If a pre-existing debt instrument or liability includes provisions for principal which had not been drawn down at that date, the Net Interest Expenditure attributable to this amount is excluded from the General Interest Deduction Limitation Rule only to the extent the lender was legally required to provide the funds upon completion of specific deliverables or project phases agreed prior to 9 December 2022 and not merely at the request of the borrower.^[114]

The Net Interest Expenditure attributable to the pre-existing debt instruments or liabilities is the lower of:^[115]

• The actual Net Interest Expenditure that arises in the Tax Period, and

• The Net Interest Expenditure that would have arisen based on the terms as they stood on 9 December 2022.

The Net Interest Expenditure in relation to a pre-existing debt instrument or liability is still subject to:

• The general rules for deduction of expenditure, therefore Interest expenditure should be incurred wholly and exclusively for the purposes of the Business, should not be capital in nature, etc. (Section 4.2),^[116] and

• The Specific Interest Deduction Limitation Rule (Section 5).^[117]

Qualifying Infrastructure Projects

Small Business Relief

A Taxable Person that is a Resident Person may elect for Small Business Relief in respect of a Tax Period if certain conditions are met, including where the Revenue of the Person is less than or equal to AED 3 million in that Tax Period and all previous Tax Periods ending on or before 31 December 2026.^[129]

If the Small Business Relief election is made for a Tax Period, the Person is treated as not deriving any Taxable Income and, therefore, cannot deduct any Net Interest Expenditure and cannot carry forward any Net Interest Expenditure incurred in the Tax Period to any subsequent Tax Period.^[130]

If, however, the Person had Net Interest Expenditure disallowed under the General Interest Deduction Limitation Rule in a previous Tax Period in which an election for Small Business Relief was not made, the Person may carry forward the disallowed amount to subsequent Tax Periods in which an election for Small Business Relief is not made.

As discussed in Section 6.2, a Taxable Person can carry forward disallowed Net Interest Expenditure for up to 10 Tax Periods. This timeframe ignores the Tax Periods in which the Person elects for Small Business Relief because the previously disallowed Net Interest Expenditure carried forward cannot be utilised during these periods.

For example, Company M has disallowed Net Interest Expenditure in its 2024 Tax Period. It did not elect for Small Business Relief in 2024 but it elected for the relief for 2025 and 2026 Tax Periods, with Company M’s Revenue below AED 3 million in all of these Tax Periods. Small Business Relief is not available for Tax Periods after 31 December 2026. Company M can use the Net Interest Expenditure carried forward from 2024 Tax Period up to and including its 2036 Tax Period.