The interest limitation rule is the part of UAE Corporate Tax most likely to surprise a leveraged or intra-group business. It accepts that interest is a real cost, but it caps how much of it can be deducted in a year, to stop profit being stripped out through debt. For most small businesses it never bites. For groups with financing, shareholder loans, or heavy borrowing, it is a rule to model before the year end, not discover at the return.
Why the rule exists
Interest is deductible, and debt is a legitimate way to fund a business. But interest is also an easy way to move profit, particularly between related parties and across borders. A company can lend to its own subsidiary and shift taxable profit into interest deductions. The general interest limitation is the guardrail. It allows interest as a cost while capping the amount, so financing decisions are made for commercial reasons rather than to erode the tax base.
How the cap works
The rule limits the deduction of net interest expenditure, meaning interest expense less taxable interest income, to a proportion of the business's earnings before interest, tax, depreciation and amortisation, adjusted for tax purposes. The proportion is set at 30% of that tax-EBITDA figure. Net interest above the cap is disallowed for the year. Importantly, disallowed interest is generally not lost. It can be carried forward and deducted in later years, subject to the same limit, so the rule often defers a deduction rather than denying it outright.
The safe harbour most businesses fall under
There is a de minimis amount below which the limitation does not apply. Where a business's net interest expenditure for the period is at or below the safe harbour, currently set at AED 12,000,000, the cap is not tested and the interest is deductible in full. This is why the rule is a non-issue for most companies. It is aimed at businesses with substantial net interest, and the safe harbour keeps ordinary borrowers out of its scope.
Related-party interest gets extra attention
On top of the general limitation, interest on certain related-party loans faces further scrutiny. Where a loan from a related party funds particular transactions, such as a dividend, a capital contribution, or an acquisition of shares in a related party, the interest may be disallowed unless there is a genuine commercial reason for the arrangement. The arm's length principle also applies, so the rate itself has to be defensible. Intra-group financing is therefore tested twice, on the amount and on the terms.
What to do about it
Work out your net interest expenditure and compare it to the AED 12,000,000 safe harbour first. If you are under it, the general limitation does not bite, though the related-party rules can still apply. If you are over it, model the 30% cap against your tax-EBITDA and plan for the carry-forward of any disallowed amount. And treat every related-party loan as a position to justify, on both its purpose and its rate. The rule rarely stops a deduction forever, but for the businesses it touches, it changes when the benefit is felt, and that is worth knowing in advance.
This article is general information on UAE Corporate Tax and is not tax advice. The interest limitation figures and conditions should be confirmed against current legislation. We would be glad to model the rule for your business.