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 earning of business before interest, tax, depreciation, and amortization (EBITDA), as to adjust 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 business, and certain other regulated financial services entity
- 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 payment (e.g., to pay a dividend or capitalize a group company): –
- Valid commercial reason – Related party lender is subject to CT (or an equal 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 expense – To entertain customer, shareholder, supplier, and other business partner
- Administrative penalty, recoverable VAT, and donation 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 reduced up to 30% of earning of business before interest, tax, depreciation, and amortization (EBITDA), as to adjust for UAE CT purposes. - Are there any exception to the limitation on the deduction of interest?
Yes, there are exceptions. Further, the rule does not apply to banks, insurance businesses, certain other regulated financial services entity, etc. - What are non-deductible expenses under UAE Corporate Tax?
Non-deductible expense include payments made to a Free Zone Person, penalty, recovered VAT, donation 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 taxable income’s deduction of interest expenses further. Further, this rule helps to ensure that business 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?
Further, a business can ensure compliance with the rules by keeping correct records of its interest expense, related party, and adjust taxable income.
