{"id":10168,"date":"2025-05-09T15:04:07","date_gmt":"2025-05-09T11:04:07","guid":{"rendered":"https:\/\/arnifi.com\/blog\/?p=10168"},"modified":"2025-07-24T17:22:58","modified_gmt":"2025-07-24T13:22:58","slug":"interest-deduction-limitations-by-fta","status":"publish","type":"post","link":"https:\/\/arnifi.com\/blog\/interest-deduction-limitations-by-fta\/","title":{"rendered":"Attention! New Guide on Interest Deduction Limitat..."},"content":{"rendered":"
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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.<\/p>\n\n\n\n

The FTA\u2019s 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)\u2014as it affects how much of those expenses can be deducted from taxable income.<\/p>\n\n\n\n

General Guidance Based on the Interest Deduction Limitations<\/h2>\n\n\n\n

Let\u2019s define \u2018interest\u2019 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.)<\/em><\/p>\n\n\n\n

General Interest Deduction Limitation Rules<\/h3>\n\n\n\n

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

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

Specific Interest Deduction Rules<\/h3>\n\n\n\n

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

Anti-avoidance scenarios<\/strong>, where interest expenses are artificially inflated or routed to low-tax jurisdictions. These rules impose stricter limitations and scrutiny<\/strong> to prevent abuse.<\/p>\n\n\n\n

Carry Forward of Disallowed Interest<\/h2>\n\n\n\n

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. <\/em>Therefore if some interest can\u2019t be deducted in the current tax period due to the cap, it can be carried forward for up to 10 years<\/strong>. This carryforward is subject to conditions<\/strong>, including continuity of ownership and the same business activity.<\/p>\n\n\n\n

Interaction with Other Corporate Tax Provisions<\/h3>\n\n\n\n

The rules don\u2019t exist in isolation. They interact with<\/strong>: Transfer pricing<\/strong>: ensuring interest rates and terms between related parties are at arm\u2019s length. Exempt income<\/strong>: ensuring companies do not shift profits to exempt or low-tax segments using interest deductions.<\/p>\n\n\n\n

Who\u2019s Exempt from These Rules?<\/h2>\n\n\n\n

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\u2014they must still comply with other relevant provisions, such as transfer pricing and general anti-avoidance rules.<\/p>\n\n\n\n

Importance of Interest Deduction Limitations<\/h3>\n\n\n\n