General Interest Deduction Rule in the UAE Corporate Tax Law

April 24, 2024by Ajay Denny0

What is included under the Provision of General Interest Deduction Limitation Rule in the UAE Corporate Tax Law? 

The General Interest Deduction Rule (GIDLR) prescribes the maximum allowed amount of net interest expenditure that can be deducted from the Taxable person’s accounting income.  

What is Net Interest Expenditure? 

The net interest expenditure includes the interest expenditure which is in excess of the interest earned during a Tax period. This also includes any carried forward net interest that was disallowed during previous Tax Periods. 

What is the Interest Cap? 

Article 30 of the CT Law limits this to 30% of the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) for the relevant Tax Period, excluding any exempt income. 

What is the significance of the General Interest Deduction Rule? 

As debt financing is generally considered a tax-free form of Capital, entities may choose to leverage the capital using excessive debt without having a valid reason to do so other than to lower the overall tax burden using the interest paid. The General Interest Deduction Rules are intended to prevent the use of excessive debt financing to artificially reduce the Taxable Income base. 

What will happen to the excess interest charged? 

The excess interest charged will be disallowed and can be subsequently carried forward up to 10 subsequent Tax periods in the order in which the amount was incurred. 

For whom does the General Interest Deduction Rule apply? 

The provisions apply to Taxable persons whose net interest expenditure for the relevant tax period exceeds the De Minimis limit. The De Minimis limit prescribed by the Ministerial Decision is AED 12,000,000 (twelve million). 

What is the De Minimis rule for the Net Interest Expenditure? 

Where the net interest expenditure exceeds the De Minimis Limit, the taxable person may deduct the higher of: 

  •  AED 12 million or 
  • 30 % of the EBITDA  

How will the rule apply when the Tax Period is more than or less than 12 months? 

Where the tax period is less than or more than 12 months, the net interest amount incurred will be adjusted in proportion to the length of the tax period. 

For whom does the General Interest Deduction Rule not apply? 

The provisions of the General Interest Deduction rule do not apply to the following Persons: 

  • A Bank. 
  • A Insurance Provider. 
  • A natural person undertaking business or business activity in the state. 
  • Any other person as may be determined by the Minister. 

How does the Net interest carry forward mechanism work? 

For the purpose of deriving taxable income during a relevant tax period, the taxable person will be allowed to deduct any net interest expense which was carried over from previous tax periods on a first in-first out basis. That is, the Net interest expenditure carried forward from the earliest period will be allowed for deduction up to the fullest extent allowable before the net interest expenditure carried forward in the more recent or current Tax period.

What is included under the definition of interest? 

Any form of monetary return that includes interest or such equivalents will be considered for the purpose of the GIDLR, regardless of the treatment under IFRS. These include: 

  • Amounts incurred in connection with raising finance (Guarantee fee, Arrangement Fee, Commitment fee, and any other fee of similar nature). 
  • Interest components of derivative instruments used for raising finance 
  • Interest equivalent component of Islamic Financial Instruments 
  • The finance element of both Financial and Non-Financial Lease 
  • Foreign exchange gains and losses accruing from interest. 
  • Capitalised Interest 

Which interest expenditures are excluded from the General Interest Deduction Rule? 

Interest income and interest expenditure incurred for Qualifying Infrastructure Projects are exempted when calculating the taxable Person EBITDA for the purpose of the General Interest Deduction Rule. 

How will the capitalized portion of interest be subject to the Interest Deduction provisions? 

Any amount of income and expenditures attributable to the interest that is capitalized 

by the Taxable Person in accordance with relevant Accounting Standards shall be 

included when the capitalized Interest is amortized over the useful life of the related 

asset, and not when the Interest is incurred. 

How is EBITDA determined? 

The provision requires that the EBITDA be arrived at by adjusting the Taxable Income with the following: 

  • Net Interest expenditure for the relevant Tax period. 
  • Depreciation and amortization expenditures are taken into account in determining the Taxable Income for the relevant Tax Period. 
  • Any Interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022. 
If you want to register for vat or corporate tax, ATB Legal helps with vat registration and corporate tax registration in the UAE.

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

by Ajay Denny

Ajay is a young ACCA Affiliate who is eager to take on challenging opportunities, pushing the status quo, thus helping make a positive impact on the Accounting Profession and the global community at large.

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