In alignment with international tax standards and to safeguard its corporate tax base, the UAE has introduced comprehensive Interest Deduction Limitation Rules under its Corporate Tax regime. These rules are designed to ensure that interest expenses claimed by businesses genuinely reflect commercial realities and are not used as tools for base erosion or profit shifting.

A. Specific Interest Deduction Limitation Rule

The purpose of this rule is to prevent corporate tax avoidance by disallowing interest deductions from artificial financing arrangements, especially between related parties or Connected Persons, that aim to shift profits out of the UAE.

When Interest is Disallowed?

Interest expenses are not deductible if the main purpose of the loan is to obtain a corporate tax advantage, even if the transaction appears commercially reasonable on the surface.
This rule especially applies to:

• UAE companies and foreign group members,
• Related entities located in low-tax jurisdictions, or
• Situations where the financing doesn’t serve a genuine business purpose.

Presumption of No Tax Advantage:
Interest payments to non-residents are presumed to not be tax avoidance if:

• The non-resident pays tax at a rate of 9% or more in their jurisdiction,
• Or the payment is subject to UAE withholding tax

Example:
A UAE company borrows from its foreign parent company in a low-tax country and incurs significant interest expense. If the primary purpose is to shift profits abroad, interest may be denied, even if the interest rate is market-based.

B. General Interest Deduction Limitation Rule (GIDLR)

This rule limits the amount of interest that can be deducted by businesses, ensuring excessive debt is not used to erode the UAE tax base.

How it Works:
You must calculate:

• Net Interest Expenditure = Interest expense – Interest income.
• The deductible amount is limited to the lower of the net interest expense or 30% of adjusted EBITDA.
• Adjusted EBITDA includes taxable income before interest, tax, depreciation, and amortization adjustments.

Deduction limit:
The higher of:

• Net Interest Expenditure, and
• 30% of Adjusted EBITDA is allowed as an interest deduction.

Carryforward Rule:
Any disallowed interest can be carried forward for up to 10 years, which means companies that are temporarily loss-making or lightly profitable can still claim interest in future profitable years.

C. Special Cases

Some entities are either partially or fully exempt from the general interest limitation rule:

• Exempt Persons, such as government entities or qualifying investment funds.
• Non-Resident Persons with interrupted permanent establishments or limited UAE nexus.
• Cash basis taxpayers must make specific adjustments when applying the 30% EBITDA rule.

Exempt Persons:

These are entities that are not subject to UAE Corporate Tax. This includes:

• Government entities,
• Certain regulated investment funds,
• Pension or social security funds, etc.

Interest deductibility rules don’t apply because these entities are not taxpayers under the law.

Non-Resident Persons:

For non-residents, interest is deductible only if the non-resident has a Permanent Establishment (PE) or a sufficient nexus with the UAE.

• If the non-resident operates a UAE branch or office, interest rules apply similarly to resident businesses.
• If they simply earn UAE income without physical presence, they cannot claim deductions.

Cash Basis Accounting:

This is applicable only to small businesses or where the Federal Tax Authority (FTA) grants approval.

• Under this method, interest is deductible only when actually paid, not when accrued.
• The 30% EBITDA limit still applies, but on cash-based EBITDA.

D. Exceptions to the General Rule

Some of the industries or cases should not be limited by the 30% interest threshold due to their economic nature or policy importance.