UAE Tax Treatment of Interest Expenses

The UAE Corporate Tax Law stipulates that net interest expense (NIE), defined as interest expense minus interest income, is deductible up to 30% of tax-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). This provision is applicable only if the NIE for the relevant tax period exceeds the threshold of AED 12 million. Should this threshold be surpassed, the taxpayer is permitted to deduct the greater of the threshold amount or 30% of EBITDA.

The following items are classified as interest under the general interest limitation rule:

1. Costs associated with obtaining financing, which include guarantee fees, arrangement fees, commitment fees, and similar charges.

2. Interest on Islamic Financial Instruments that adhere to Sharia principles, as well as any equivalent instruments or a combination thereof.

3. The interest component of forward contracts, futures contracts, options, interest rate swaps, foreign exchange swaps, or other financial derivative instruments.

4. The financing portion of both finance and non-finance lease payments.

5. Foreign exchange gains.

EBITDA is primarily the taxable income adjusted for the following factors:

1. NIE for the relevant tax period (excluding amounts related to qualifying infrastructure projects).

2. Depreciation and amortization expenses considered in calculating the taxable income for the relevant tax period.

3. Any interest income or expenditure associated with historical financial assets or liabilities held prior to 9 December 2022.

If the EBITDA calculated from the above adjustments is negative, the amount to be used for determining the 30% limit will be AED 0.

NIE linked to debt instruments with terms established before 9 December 2022 is exempt from the general interest limitation rule. Additionally, NIE incurred by entities involved in qualifying infrastructure projects will not be subject to this limitation.

It is important to note that the interest limitation rules do not apply to banks or insurance companies.