The UAE Corporate Tax Law incorporates measures to regulate the deductibility of interest expenditure with the aim of discouraging excessive reliance on debt financing and ensuring that interest incurred on debt arising from specific intra-group transactions is deductible only when a valid commercial rationale for obtaining the loan exists.

GENERAL INTEREST DEDUCTION LIMITATION RULE: Net Interest Expenditure, defined as the Taxable Person’s interest expenditure exceeding interest income, is a crucial determinant. Businesses with Net Interest Expenditure falling below the AED 12 million de minimis threshold within a Tax Period are exempt from the General Interest Deduction Limitation Rule for that period. For those with Net Interest Expenditure exceeding AED 12 million, the deduction is limited to the greater of 30% of the Taxable Person’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the Tax Period or the de minimis threshold. Any Net Interest Expenditure exceeding this limit can be carried forward and used to offset the Taxable Income over the subsequent 10 Tax Periods. It’s important to note that the General Interest Deduction Limitation Rule does not apply to Banks, other financial institutions, Insurance Providers, or natural persons.

SPECIFIC INTEREST DEDUCTION LIMITATION RULE: In instances where a loan is secured from a Related Party and is employed to finance income exempt from Corporate Tax, the interest on this Related Party loan cannot be deducted unless the Taxable Person can substantiate that the primary motive behind obtaining the loan and conducting the transaction is not solely for the purpose of obtaining a Corporate Tax benefit.