The Interest Deduction Limitation Rule: When UAE Corporate Tax Caps Your Interest

Interest on business borrowing is deductible under UAE Corporate Tax. That is the starting point, and for most companies it is also the finishing point. But there is a ceiling. Once a business carries enough debt, the General Interest Deduction Limitation Rule caps how much of its interest bill can be set against taxable profit in a single year. Understanding where that ceiling sits — and how far most businesses are from it — saves a lot of unnecessary worry.

The rule in one sentence

You can deduct net interest expenditure up to the greater of AED 12 million or 30% of your tax-adjusted EBITDA. Whichever of those two figures is larger becomes your cap for the year.

Two things follow from the word "greater". A business with modest profits but heavy borrowing still gets the full AED 12 million. A business with strong earnings gets 30% of them, which can run well above AED 12 million. The rule is designed so neither measure alone determines the outcome.

The AED 12 million floor does most of the work

This is the part that gets lost in the technical write-ups. If your net interest expenditure for the tax period is AED 12 million or less, the rule simply does not restrict you. There is no EBITDA calculation to perform and no disallowance to track.

AED 12 million of net interest is a lot of debt. At, say, a 6% rate, it implies borrowings of around AED 200 million. Most UAE businesses will never approach that, and if your interest bill is nowhere near it you can stop worrying about this rule.

Plenty of businesses do reach it, though, and they are not only the very largest. Debt-heavy sectors get there on ordinary balance sheets — real estate and property holding groups, contracting and infrastructure businesses, hospitality, and any company that has funded an acquisition. Multinational groups using intra-group lending are caught routinely. If your borrowing is measured in hundreds of millions, assume the rule is in play and check rather than assume.

How the cap works in practice

Net interest expenditure is not the same as the interest you paid. It is interest expense minus taxable interest income. A company that borrows and also earns interest on deposits nets the two off before testing the cap.

Look at the first row. The 30% measure would have allowed only AED 4.5 million, but the AED 12 million floor overrides it and the whole interest bill is deductible. That is the floor protecting a business with real borrowings and thin earnings.

The third row is the opposite case. Earnings are strong enough that 30% of EBITDA — AED 24 million — beats the floor, so the company deducts twice what the floor alone would have allowed. It still has AED 12.7 million disallowed, because its borrowing outruns even that.

What tax-adjusted EBITDA means

EBITDA here is not the figure straight off your management accounts. It starts from taxable income and adds back net interest expenditure, depreciation and amortisation, with further adjustments required by the Corporate Tax rules. Exempt income — qualifying dividends, for example — is stripped out, because you should not build deduction capacity on profits that are not taxed in the first place.

The practical consequence is that your accounting EBITDA and your tax-adjusted EBITDA can differ by a wide margin, particularly in holding companies where much of the income is exempt participation income. Run the tax figure, not the accounting one.

Disallowed interest is not lost

Interest that fails the cap in one year carries forward for up to 10 tax periods. In a later year with more headroom — higher earnings, or lower borrowing — it can be deducted.

That makes the disallowance a timing difference rather than a permanent cost, provided the headroom eventually arrives. It also creates a tracking obligation. You need a running schedule of net interest expenditure, the amount restricted each year, the carry-forward balance, and what has been used. Businesses that fail to keep this lose deductions they were entitled to, simply because nobody recorded them.

What you need to be able to show

There is a step that comes before the cap, and it is the one businesses most often overlook. Interest is only deductible in the first place where the borrowing was incurred wholly and exclusively for the purposes of the business. If the commercial purpose of a loan cannot be evidenced, the deduction can be challenged before the limitation rule is ever reached — so the paperwork that establishes why you borrowed matters as much as the arithmetic that follows.

In practice, four things need to be capable of being produced on request:

• The commercial purpose of each borrowing — board approvals, facility agreements, and what the money was actually used for.
• The net interest expenditure computation, showing interest expense and the taxable interest income netted against it.
• The tax-adjusted EBITDA computation, including the exempt income stripped out.
• The carry-forward schedule — amounts restricted in each period, and what has since been utilised.

None of this is onerous while the year is running. Reconstructing it two years later, during an FTA review, is a different exercise entirely.

Who sits outside the rule

Three categories are excluded:

• Banks — interest is the raw material of the business, not a financing choice.
• Insurance providers — for the same reason.
• Natural persons conducting a business or business activity in the UAE.

On that last point, natural persons only come within Corporate Tax at all where turnover from business exceeds AED 1 million in a calendar year. Wages, personal investment income and real estate investment income sit outside the regime whatever the amount. For most individuals, then, this rule never arises in the first place.

Certain long-term infrastructure projects also receive specific treatment, reflecting how much debt such projects necessarily carry. If you are financing infrastructure, check the conditions rather than assuming either way.

Why the rule exists

Interest is deductible; dividends are not. Left unchecked, that asymmetry invites groups to push debt into whichever country taxes profits most heavily and strip the taxable base there. The UAE's rule follows the approach recommended under BEPS Action 4, which most major jurisdictions have now adopted in some form.

It does not discourage borrowing. It keeps the deduction proportionate to the earnings the borrowing actually supports.

What to do if you are anywhere near the threshold

If your net interest is within sight of AED 12 million, or your group uses intra-group debt, these are worth doing before year end rather than after:

1. Review your existing facilities and financing structure, so you know what the interest profile looks like across the whole group rather than company by company.
2. Calculate net interest expenditure — interest expense less taxable interest income — rather than assuming the gross figure.
3. Forecast tax-adjusted EBITDA, stripping out exempt income, so you know which limb of the test applies.
4. Price intra-group loans at arm's length. A related-party loan that fails transfer pricing can be restricted before this rule is even reached.
5. Weigh further debt against equity funding. Where the cap is already binding, additional borrowing costs the same in cash but no longer reduces tax at the same rate — which changes the real cost of the capital.
6. Open a carry-forward schedule now, so restricted amounts are captured from the first year they arise.

Most UAE businesses will read this rule, check their interest bill, and move on — which is the right outcome. For the minority carrying serious debt, the difference between planning for the cap and discovering it at filing can be several million dirhams of deferred deduction. If your balance sheet is leveraged and you want the position modelled properly, talk to our team.