Deductions Under UAE Corporate Tax Laws – General Interest Deduction

The General Interest Deduction in the UAE's Corporate Tax system allows taxable persons to reduce their taxable income under specific conditions outlined in the corporate tax laws.

This article aims to break down the General Interest Deduction in simple terms, explaining who can benefit from it and when it can be utilized by businesses. Whether you're a business owner, a tax professional, or someone interested in the UAE's tax system, this article provides practical insights to help you understand and navigate through these changes.

Corporate Tax allows various deductions on a taxable person’s income subject. There are a few conditions provided under the corporate tax stated in the UAE law. A Deduction is an amount that can be reduced from the taxable income during the calculation of tax liability.

One key aspect of the UAE's Corporate Tax system is the General Interest Deduction, which allows taxable persons to reduce their taxable income under specific conditions outlined in the corporate tax laws. This deduction will be done as net interest expenditure – that is, the deduction applies to the net interest expenditure, calculated as the difference between taxable interest expenditure and taxable interest income.

(Net Interest = Taxable Interest Expenditure – Taxable Interest Income.)

Note - It should be noted that disallowed interest expenditure as per corporate tax laws shall not be included in the calculation.

The general interest deduction is subject to a maximum of 30% of the net interest expenditure from EBIDTA for the tax period.

The general interest deduction limitation rule will not apply if the taxable person’s net interest expenditure for the particular tax period is less than AED 12 million.

This means, a taxable person shall cap their interest deduction at 30% of EBIDTA only in case when the general interest deduction exceeds 12 million.

• EBIDTA : Taxable Income – Net Interest Expenditure – Depreciation & Amortization

• If the EBITDA arrived at after the above calculation is negative, the amount of EBITDA to be considered for determining the 30% limit will be AED 0.

Not all entities are eligible to claim these deductions. Insurance providers, banks, natural persons conducting business activities within the state, and individuals specified by the Minister are exempt from claiming deductions. Moreover, a taxable person who has acquired a loan from a related party may be ineligible for a deduction on interest expenditure if certain conditions are met:

If profits or dividends are paid to the related party.

If a capital contribution to the related party occurs.

If the taxable person transfers shares to the related party anticipating share capital return, repurchase, reduction in capital, or redemption.

If the ownership stake is purchased from someone involved in an acquisition, making them a related party.

If the taxable person is involved in any of the above-mentioned activities and can provide evidence that they did not do so to gain a corporate tax advantage, they may be permitted deductions in interest expenditure.

The General Interest Deduction rule under Corporate Tax in UAE stands out as a crucial element for businesses navigating the taxation policies. Understanding the rules, limitations, and exceptions associated with this deduction is vital for companies looking to optimize their tax liabilities while fostering sustainable financial growth.