General Interest Deduction Limitation Rule in UAE
In UAE, Article 30 of the Corporate Tax Law provides for a general limitation on Net Interest Expenditure deductions. This is a common practice in various other regions and aims to curb the manipulation of Taxable Income by excessive reliance on debt financing. Ministerial Decision No. 126 of 2023 elaborates on the General Interest Deduction Limitation Rule and outlines the regulations governing its implementation.
Net Interest Expenditure
Net Interest Expenditure (NIE) is defined as the amount of Interest expenditure that is in excess of the Interest income amount. The law provides that the NIE for a Tax Period is the amount of NIE incurred in that period, in addition to any carried forward that was disallowed under this Article in previous Tax Periods.
The deduction of allowable NIE must be taken in the order that it was incurred. In other words, the deduction of Interest expenditure follows a “first in first out” rule, where carried forward NIE incurred in earlier Tax Periods is deducted to the fullest extent allowable before the deduction of NIE incurred in more recent or in the current Tax Period.
General Interest Deduction Limitation Rule
The General Interest Deduction Limitation Rule (GIDLR) establishes the maximum cap on interest deduction for businesses that are not banks, insurance providers, or natural persons (individuals) undertaking a business or business activity in the UAE. The GIDLR is also not applicable to entities electing for the Small Business Relief.
The Decision lays out ‘De Minimis Net Interest Expenditure’ according to which the GIDLR shall not apply if NIE for the relevant Tax Period does not exceed AED 12,000,000. Hence, in case the NIE exceeds the threshold of AED 12,000,000, the deduction to taxable income will be limited to a higher of:
1. AED 12,000,000 or
2. 30% of the EBITDA for the relevant tax period
In case the Tax Period is more than or less than twelve months, AED 12,000,000 should be adjusted in proportion to the length of the Tax Period.
Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA)
The Decision defines EBITDA as the highest of -
1. AED 0 or
2. Taxable Income with the addition of NIE for the relevant Tax Period, depreciation and amortization expenditure, and any interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022
Should the calculated EBITDA result in a negative value, the EBITDA amount for determining the 30% limit will be regarded as AED 0.
The GIDLR reflects the UAE's commitment to aligning with global norms while fostering a conducive business environment. By establishing a ceiling on interest deductions, the rule ensures a fair tax framework. Moreover, by adhering to international benchmarks - the deduction limit is set at the greater of 30% of adjusted EBITDA or AED 12 million - they are promoting responsible financial practices.
Does the General Interest Deduction Limitation Rule apply to your business? Not sure? Contact us to know more or have a look at our Corporate Tax services
