The UAE’s Federal Tax Authority (FTA) has released an updated and comprehensive guide on Interest Deduction Limitation Rules under the Corporate Tax Law. This guide aims to clarify how businesses should treat interest expenditure when calculating their Taxable Income. 

Purpose of the Guide 

This Corporate Tax Guide is intended to help businesses understand: 

• What qualifies as interest for tax purposes? 

• How are interest expenses treated under both general and specific limitation rules? 

• How to calculate net interest expenditure? 

• The treatment of Islamic financial instruments. 
• When can capitalized interest be deducted? 

Key Highlights and Major Amendments 

Broader Definition of “Interest”: 

• The guide expands the definition beyond just traditional loan interest to include: 

• Discounts and premiums on bonds, 

• Profits from Islamic financial instruments (e.g. Murabaha, Sukuk), 

• Fees in repo, stock lending, and factoring transactions, 

• Amounts economically equivalent to interest. 
• Clarification: Returns from collective investment schemes primarily invested in cash equivalents (e.g. money markets) will now be treated as interest income, not dividends. 

Specific and General Interest Deduction Limitation Rules 

Specific Limitation Rule (Article 31) 

• Disallows deduction of interest where the main purpose of the arrangement is to gain a tax advantage. 

• Anti-avoidance provision primarily targeting related party transactions and base erosion schemes. 

General Limitation Rule (Article 30) 

• Limits net interest deduction to 30% of adjusted EBITDA. 
• Introduces carry forward of disallowed interest for up to 10 years. 

Adjusted EBITDA is calculated as follows: 

Capitalized Interest Now Handled Differently 

Interest that is capitalized into the cost of an asset (e.g., for self-constructed assets) is not deductible immediately. Instead, it’s amortized over the useful life of the asset 

• While calculating the Interest Expenditure, the capitalized 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.  
• While calculating 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 because that amount is re-characterized from being depreciation to being Interest in that Tax Period.  

Let’s understand this with the following example: 

Company Q (incorporated and tax resident in the UAE) follows the Gregorian calendar year as its Financial Year and Tax Period. It decided to build a machine in the UAE to manufacture drinks. To fund the machine, Company Q obtained a bank loan in its 2025 Tax Period of AED 10 million for a period of 1 year at an annual interest rate of 10% with an agreement that the principal will be repaid at the start of year 2. Company Q also paid the bank AED 200,000 for loan processing fees. 

Based on the applicable Accounting Standards followed by Company Q, the following amounts were capitalised in the year ended 31 December 2025: 

• AED 10 million spent on constructing the machine (assuming that the machine meets the asset recognition test as per IFRS or IFRS for SMEs),
• AED 1 million interest payable in 2025 (AED 10 million * 10%), and
• AED 200,000 loan processing fees.

The cost of the machine recorded in the Financial Statements at 31 December 2025 is AED 11.2 million. The machine was brought into use on 1 January 2026. The useful life of the machine was estimated to be 10 years. However, Company Q decides to apply a rate of 15%, applying the diminishing value approach for depreciation. Accordingly, during the 2026 Tax Period, a depreciation charge of AED 1,680,000 (15%*11.2 million) is recorded in the income statement. During the 2026 Tax Period, AED 1.2 million (i.e. capitalised interest in Year 1 of AED 1 million and loan processing fees of AED 200,000) is amortised on a straight-line basis over the useful life of the asset of 10 years, being AED 120,000 per annum. Accordingly, for Tax Period 2026, AED 120,000 is treated to be Interest while computing Net Interest Expenditure, and the same amount is excluded from depreciation while computing adjusted EBITDA. 

Exemptions and Exceptions 

The General Limitation Rule does not apply to: 

• Banks and insurance providers; 

• Natural persons conducting business in the UAE; 

• Qualifying infrastructure projects; 

• Small Business Relief recipients (Revenue < AED 3 million); 
• Historical financial liabilities (existing before 9 Dec 2022 and not modified thereafter). 

Practical Impact for Businesses 

• Businesses need to segregate and classify interest-related expenses accurately in line with the expanded definitions. 

• Proactive planning is essential to ensure interest deduction doesn’t exceed 30% of adjusted EBITDA. 
• Careful review is required for related party loans, Islamic financing structures, and capitalization policies. 

Conclusion 

With this updated guide, the FTA reinforces its commitment to aligning the UAE’s Corporate Tax system with international standards. Taxpayers are advised to review their financing arrangements, assess deductibility of interest expenditures, and ensure full compliance with both Article 30 and 31 of the UAE Corporate Tax Law.