UAE corporate tax caps the net interest a business can deduct. The deductible amount is limited to the higher of 30% of EBITDA, measured as the law defines it, or AED 12 million. A business whose net interest stays within AED 12 million is not affected. Banks, insurers and individuals carrying on a business are treated separately.
What the rule says
The general interest deduction limitation sits in the Corporate Tax Law, Federal Decree-Law No. 47 of 2022, and is explained further in Ministerial Decision No. 126 of 2023. In summary, the net interest expenditure you can deduct in a tax period is limited to the higher of two amounts: 30% of your earnings before interest, tax, depreciation and amortisation, and a safe harbour of AED 12 million. Net interest expenditure means interest expense less interest income. The Ministry of Finance explains the rule on its website, so confirm the wording there before you rely on a figure.
Who the rule applies to
The cap applies to most taxable persons that borrow. Banks and insurers are excluded from the general rule, as are individuals carrying on a business in their own name under the thresholds that apply to them. If you are part of a tax group, the group is treated as a single taxable person, so the cap is measured at group level. See UAE corporate tax groups.
A worked example
| Item | Company A | Company B |
|---|---|---|
| EBITDA (as defined) | AED 20 million | AED 100 million |
| 30% of EBITDA | AED 6 million | AED 30 million |
| Safe harbour | AED 12 million | AED 12 million |
| Cap (the higher figure) | AED 12 million | AED 30 million |
| Net interest expense | AED 8 million | AED 35 million |
| Deductible | AED 8 million | AED 30 million |
| Disallowed in the period | Nil | AED 5 million |
The figures are illustrative. They show that most small and mid-sized UAE businesses sit under the safe harbour and never feel the cap, while highly geared groups do.
What counts as interest
The definition is wider than the interest line in a bank statement. Commentary on the Ministerial Decision lists the finance element of lease payments, returns on Islamic financing, capitalised interest and certain foreign exchange differences and derivative results. Check how your accounts classify each financing cost, because an item you book as a fee may fall within the definition.
Carve-outs to check
Reported carve-outs include interest on debt taken on before the law was published on 9 December 2022 and certain long-term infrastructure projects that meet set conditions. These carve-outs have conditions of their own. Do not assume an old loan qualifies without checking the decision text and keeping the loan agreement and drawdown evidence.
What to model before year end
- Net interest for the tax period, including capitalised and lease-related elements.
- EBITDA on the basis the law uses, not a management-adjusted figure.
- The cap, being the higher of 30% of EBITDA and AED 12 million.
- Any group effect if you are in or joining a tax group.
- Interest paid to related parties, which also faces the arm's length test. See arm's length methods.
How it fits with other rules
The interest cap is one of several limits on deductions. Read it with deductible expenses and, for large groups, the domestic minimum top-up tax.
Measuring EBITDA
The cap depends on the earnings measure the law uses, not the one in a lender's covenant or a management dashboard. Start from accounting profit, add back net interest, tax, depreciation and amortisation, and then apply the adjustments the Ministerial Decision requires. Exempt income, such as income that qualifies for the participation exemption, is generally left out of the measure. Because definitions can differ in detail, ask your adviser to prepare the computation on the legal basis, and keep a bridge from the accounts.
Where the cap bites
The AED 12 million safe harbour means a business needs a net interest bill above that level before the 30% test even matters, and the 30% test only helps businesses with very large earnings. The cap is most likely to affect real estate and holding structures with high borrowing, leveraged acquisitions, and groups that fund subsidiaries by loans rather than equity. For an owner-managed trading company with a bank overdraft or a term loan of a few million dirhams, the safe harbour usually covers all the interest.
Leases and financing arrangements
Under IFRS 16, most leases appear on the balance sheet with a finance cost, so the interest element of lease payments can count towards net interest expenditure. Companies with many property leases should include them in the model. The same applies to murabaha and other Islamic finance, where the profit element is treated like interest. See IFRS vs IFRS for SMEs for how the accounting standard affects classification.
Related-party loans
A shareholder loan priced above or below market faces an additional test under the transfer pricing rules. Even when net interest is below the cap, the rate must be arm's length. Document the loan agreement, the rate, the benchmarking and the repayment terms. See transfer pricing benchmarking and the related party disclosure form.
When to take advice
If your modelling shows net interest above AED 10 million, if you plan an acquisition financed by debt, or if you intend to join or form a tax group, take advice before signing the financing. The cost of fixing a financing structure after the fact is usually much higher than the cost of modelling it first. Our corporate tax team can run that model with you.
Monitoring the cap through the year
Do not wait for the year end. Each quarter, compare net interest to the projected cap. If a refinancing, an acquisition or a seasonal borrowing peak pushes you close to AED 12 million, discuss it with your adviser while there is still time to adjust the structure. For example, a shareholder could convert part of a loan to equity, subject to the commercial and legal effects.
Disclosures and returns
The corporate tax return requires information on interest and on any disallowance. Keep a schedule that shows the net interest calculation, the EBITDA figure used and the disallowed amount, and file it with the return workings. See corporate tax return filing.
Talking to your bank
Lenders may price a loan on the assumption that interest is fully deductible. If the cap changes your after-tax cost, tell the bank when you negotiate covenants. Agree definitions of EBITDA and interest that fit the tax rule, so that your covenant tests and tax test do not contradict each other.
Frequently asked questions
Net interest expense is deductible up to the higher of 30% of EBITDA and AED 12 million in a tax period. Amounts above the cap are not deductible in that period.
No. If net interest expenditure does not exceed the AED 12 million safe harbour, the limitation does not apply.
Banks and insurers are outside the general rule. Individuals carrying on a business are also treated separately. Confirm the position for your entity.
Interest expense less interest income, using the law's definition of interest, which can include the finance element of leases and certain Islamic finance returns.
Commentary reports a carve-out for debt entered into before 9 December 2022, subject to conditions. Check the decision text and keep the loan documents.
A tax group is treated as one taxable person, so the calculation is made at group level.