UAE Corporate Tax:​ Interest Deduction Limitation Rules

Key highlights​

Meaning of Interest ​

The Guide specifies the order of the rules that impact interest deductibility as follows: ​

• General principle of deductibility of expenditure, ​

• Arm’s length principle, ​

• Specific Interest Deduction Limitation Rule (SIDLR), ​

• General Interest Deduction Limitation Rule (GIDLR). ​

The Guide includes around 24 pages covering meaning of interest. This section gives a lot more detail and guidance about the intention of the rules, capturing different type of arrangements and providing detailed examples on what will be considered as interest, mainly for the following categories: ​

• Amount accrued or paid for the use of money or credit,​

• Discounts and premiums, ​

• Profit paid in respect of an Islamic financial instrument, ​

• Other payments economically equivalent to Interest, and​

• any other amounts incurred in connection with the raising of finance. ​

We note the following observations: ​

• For Capitalised Interest, the Guide provides a detailed example on how interest will be calculated for tax purposes and accordingly be excluded from depreciation whilst calculating the EBITDA. Also, it provides a detailed example on disposal of asset with capitalized interest and the impact on the net interest expenditure for the year of disposal. ​

• The Guide clarifies that interest on late payment of statutory dues are considered as fines or penalties and are not deductible for CT purposes. The interest element will not be considered as interest.​

• For amounts incurred in connection with raising of finance, the Guide clarifies that legal and professional fees, and amounts related to prepayment of loans should be treated as interest expenditure.

Deductible Interest Expenditure ​

This section re-emphasize the ordering of the rules impacting the interest deductibity. ​

Regarding the deductibility principles the Guide re-emphasizes that 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. ​

The Guide clarifies that specific adjustments must be made to the following expenditure: ​

• expenditure not incurred for the purposes of the Taxable Person’s Business ​

• expenditure incurred in deriving Exempt Income, other than certain Interest expenditure and​

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

For the interest expenditure relating to deriving exempt income, the Guide includes a defined list of exempt income types being exempt income from Dividends and other profit distributions received from a juridical person that is a Resident Person or from a Participating Interest in a foreign juridical person, other income from a Participating Interest, income of a Foreign Permanent Establishment, and income derived by a Non-Resident Person from operating aircraft or ships in international transportation. Any interest incurred in relation to any of the listed exempt income is deductible subject to meeting the criteria set by the GIDLR and SIDLR. ​

The Guide includes example on interest expenditure due to Connected Persons an or Related Parties and the impact of any transfer pricing adjustments on the net interest expenditure calculation. Mainly that only arm's length interest applied will be deductible for CT purposes and considered as interest expense for the purpose of calculating net interest expenditure. ​

Application of GIDLR and SIDLR​

This section of the Guide reiterates on what is included in the CT Law and Ministerial Decision No.126 of 2023 relating to interest deduction limitation rules. Also it provides detailed examples and calculations. We note the following main observations: ​

• For SIDLR purposes (i.e. only for related party loans used for specific purposes listed in Art 31 of CT Law), the Guide states that the onus is on a Taxable Person to demonstrate that the main purpose of a related party loan is not to gain a Corporate Tax advantage. Here, a safe harbor or a presumption of no Corporate Tax advantage applies in case of a Related Party being a Non-Resident if the Non-Resident is subject to an effective tax rate of not less than 9% in its foreign jurisdiction. ​

• For the purpose of calculation of Net Interest Expenditure the following will not be included when calculating the Net Interest Expenditure: ​

  • Interest expenditure that is disallowed under any other provisions of the CT Law,​

  • Interest income or expenditure related to grandfathered debts, i.e. prior to 9 December 2022, ​

  • 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 Net Interest Expenditure of the Tax Group​

Exceptions to GIDLR ​

The Guide includes the specific cases and examples where the GIDLR does not apply. Included in this list are:​

1. Banks and insurance providers ​

2. Natural persons undertaking business in the UAE ​

3. Historical financial liabilities (debt instruments or liabilities with terms agreed upon before 9 December 2022)​

4. Qualifying Infrastructure Projects ​

5. Small Business Relief

Note that for cases #3-4 above, they are still subject to (i) general rules on business purpose and not being capital in nature and (ii) SIDLR.​

Next Steps​

The Guide provides clarity on the deductibility of Interest expenditure while calculating the Taxable Income along with useful illustrations. It is critical for taxpayers to consider this Guide and determine its impact on their taxable income.

Interest deduction limitation rules are crucial for tax compliance and planning. It is essential to stay alert and adapt to evolving UAE CT legislation for tax efficiency and tax compliance.

For further assistance, you can reach us by emailing CT.UAE@pwc.com​