Limitation of Deduction of Interest under UAE CT
- Tax Base Erosion
- Deductible interest payments, where the recipient of the interest income is not taxed (e.g., an individual shareholder or a Free Zone Person)
- Net interest expense can be deducted to 30% of a business’s earnings before interest, tax, depreciation, and amortization (EBITDA), as adjusted for CT purposes
Exceptions
Related Party – Pre-existing relation with UAE business through
- Businesses may be allowed to deduct interest up to safe harbor
- NA to banks, insurance businesses, and certain other regulated financial services entities
- Consolidated group to apply rules by reference to the group’s overall position
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Related Party Interest
- Arm’s length interest ;
- Used for intra-group transactions (e.g., to pay a dividend or capitalize a group company): –
- Valid commercial reason – Related party lender is subject to CT (or an equivalent tax) of at least 9% on the interest income earned.
Non-deductible expenses
- Related party payments to a Free Zone Person that is taxed at 0% – Mainland Branch
- 50% of expenditure to entertain customers, shareholders, suppliers, and other business partners
- Administrative penalties, recoverable VAT, and donations paid to unapproved charity
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FAQs
- What is the limitation on the deduction of interest under UAE CT?
The net interest expense can be deducted up to 30% of a business’s earnings before interest, tax, depreciation, and amortization (EBITDA), as adjusted for UAE CT purposes. - Are there any exceptions to the limitation on the deduction of interest?
Yes, there are exceptions. The deduction of interest limitation does not apply to banks, insurance businesses, certain other regulated financial services entities, etc. - What are non-deductible expenses under UAE Corporate Tax?
Non-deductible expenses include payments made to a Free Zone Person, administrative penalties, recoverable VAT, donations paid to an unapproved charity, etc. - How does the limitation on the deduction of interest impact tax base erosion?
The limitation on the interest deduction aims to prevent tax base erosion by limiting the amount of interest expense that can be deducted from taxable income. This limitation helps to ensure that businesses do not shift profits to related parties in low-tax jurisdictions by paying high amounts of interest. - How can a business ensure compliance with the deduction limitation rules?
A business can ensure compliance with the deduction limitation rules by keeping accurate records of its interest expenses, related party transactions, and adjusted taxable income. Seeking the advice of a UAE Corporate Tax consultant can also help businesses ensure compliance with these rules.
