Net Interest Deduction Limitation Rule for Corporate Tax
Article 30 of the Corporate Tax Law
The Net Interest Deduction Limitation Rule, as outlined in Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, imposes restrictions on the deductibility of a taxable person's net interest expenditure. According to Article 30 of the Corporate Tax Law, the deduction is limited to 30% of the taxable person's accounting earnings before interest, tax, depreciation, and amortization (EBITDA) for the relevant tax period, excluding any exempt income under Article 22 of Corporate Tax Law.
The Net Interest Expenditure disallowed under above provision may be carried forward and deducted in the subsequent (10) ten Tax Periods in the order in which the amount was incurred, subject to Clauses 1 and 2 of Article 30 of Corporate tax Law.
For example, let's consider Company A. In a specific tax period, Company A earns AED 80,000,000 before interest, tax, depreciation, and amortization. Their net interest expenditure is AED 24,000,000. According to the 30% rule, Company A can deduct only AED 12,000,000 as a business expense. The remaining AED 12,000,000 can be carried forward and deducted in the next ten tax periods, subject to the conditions mentioned in Clauses 1 and 2 of Article 30. This provision aims to limit excessive interest deductions for tax purposes and prevent significant reductions in a business's tax liabilities.
Limitation on General Interest Deductions
Ministerial Decision No. 126 of 2023 states that payments similar to interest, such as those used in Islamic financing, will be treated as interest deductions under the Corporate Tax Law, regardless of how they are classified in the accounting records.
The definition of interest includes various types of transactions, such as the interest component on both performing and non-performing debt instruments. It also encompasses interests in investment schemes that mainly invest in cash and cash equivalents, collateralized asset-backed debt securities, agreements for the sale and repurchase of securities, stock lending agreements, securitizations, lease or hire purchase arrangements, factoring transactions, and more.
Additionally, fees related to raising funds, like guarantee fees, arrangement fees, commitment fees, and similar charges, are considered as interest. Foreign exchange gains and losses resulting from interest will also be regarded as interest for tax purposes.
Maximum amount deductible for Net Interest Expenditure
The limitation on the deductible Net Interest Expenditure provided under Clause (1) of Article (30) of the Corporate Tax Law shall not apply where the Net Interest Expenditure for the relevant Tax Period does not exceed AED 12,000,000 (twelve million dirhams).
Overall, these provisions aim to regulate the deduction of interest expenses and ensure a balanced tax treatment of corporations and businesses in the UAE.
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