Attention! New Guide on Interest Deduction Limitations – By FTA

The Federal Tax Authority (FTA)has brought new key points on the corporate tax guide, focusing in the interest deduction limitations & rules under the UAE corporate tax law in April 2025.

The FTA’s guide provides clarity on how businesses in the UAE should treat interest expenses for corporate tax purposes. It is essential for any company that works on financing costs, especially those using debt (including intercompany loans)—as it affects how much of those expenses can be deducted from taxable income.

General Guidance Based on the Interest Deduction Limitations

Let’s define ‘interest’ to see who will be affected by these new corporate tax policies on interest rates. This includes all the conventional interest payments as well as the Islamic finance equivalent i.e. profit rates under shariah-compliant structure. (Shariah-compliant funds are investment funds governed by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are considered to be a type of socially responsible investing.)

General Interest Deduction Limitation Rules

A business cannot deduct unlimited interest expenses from its taxable income. The deductible interest is capped at the higher of: AED 12 million annually OR 30% of adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

This is in line with international best practices (e.g., OECD BEPS Action 4) to prevent base erosion through excessive interest deductions.

Specific Interest Deduction Rules

The new interest deduction is more complex or sensitive cases in a few cases like – Related-party transactions (e.g., intercompany loans within a group structure).

Anti-avoidance scenarios, where interest expenses are artificially inflated or routed to low-tax jurisdictions. These rules impose stricter limitations and scrutiny to prevent abuse.

Carry Forward of Disallowed Interest

So it is important to understand what disallowed interest means – The amount of any business interest expense that is not allowed as a deduction during the tax year. Therefore if some interest can’t be deducted in the current tax period due to the cap, it can be carried forward for up to 10 years. This carryforward is subject to conditions, including continuity of ownership and the same business activity.

Interaction with Other Corporate Tax Provisions

The rules don’t exist in isolation. They interact with: Transfer pricing: ensuring interest rates and terms between related parties are at arm’s length. Exempt income: ensuring companies do not shift profits to exempt or low-tax segments using interest deductions.

Who’s Exempt from These Rules?

Certain entities are exempt from the interest deduction limitation, including Banks, Insurance companies, and Qualifying infrastructure projects. However, these entities are not exempt from all tax rules—they must still comply with other relevant provisions, such as transfer pricing and general anti-avoidance rules.

Importance of Interest Deduction Limitations

• Compliance: These rules help businesses remain compliant with the new UAE Corporate Tax framework introduced in 2023.
• Avoiding Penalties: Incorrectly claiming interest deductions can lead to penalties or audits.
• Strategic Financial Planning: Companies with high levels of borrowing or intra-group financing must reassess their capital structures, interest terms, and documentation to align with the rules.
• International Alignment: The guide shows the UAE’s commitment to international tax standards, such as those outlined by the OECD, enhancing its reputation as a transparent, tax-compliant jurisdiction.

Key Takeaways

This FTA’s guide is a compliance and planning tool for businesses operating in the UAE. It ensures that interest deductions are fair, economically justifiable, and do not result in profit shifting or tax base erosion. Companies need to:

• Understand what qualifies as interest.
• Assess whether they’re subject to the limitation rules.
• Implement systems to monitor adjusted EBITDA and carryforward amounts.
• Ensure related-party interest transactions meet transfer pricing standards.

How Can Arnifi Help?

Understanding these new rules and implementing them in your business routine will be a little complicated. Our corporate tax & accounting experts at Arnifi will help you walk through these policies and find ways to improve and maximize profits. Get a free consultation now!