With the introduction of Corporate Tax in the UAE, businesses must now pay close attention to how expenses are reported—especially those involving interest on borrowed funds. The Federal Decree-Law No. 47 of 2022 outlines how interest can be deducted from taxable income—but there are limitations.
This guide by ESMC Global, a trusted name in UAE tax and compliance solutions, breaks down what qualifies as an interest deduction in UAE, who it applies to, and how to stay compliant with the latest tax regulations.
What is Interest Deduction?
Interest deduction refers to the ability of a business to subtract the costs of borrowing (interest payments) from its taxable income. This reduces the overall tax liability, but only if the interest qualifies under the conditions defined by the UAE Corporate Tax Law.
At ESMC Global, we help businesses in the UAE structure their finances to ensure maximum allowable deductions.
Types of Interest That Qualify
According to the law, the following types of interest may be deductible:
- Interest on loans for business expansion
- Bank overdrafts used for operational purposes
- Payments economically equivalent to interest (e.g., finance leases, Islamic financial instruments)
- Premiums and discounts on debt instruments
However, interest must be directly related to the taxable business activity.
General Limitations to Interest Deduction
The UAE applies a General Interest Deduction Limitation Rule to avoid profit shifting and base erosion. The rule limits deductible net interest expense to 30% of adjusted EBITDA. If your net interest expense exceeds this limit, the excess is not deductible in that tax period—but it can be carried forward for up to 10 years. ESMC Global can help you calculate and monitor this threshold with precision.
Conditions for Allowing Interest Deduction
Businesses can only claim interest deduction if the following are met:
- The expense is incurred wholly and exclusively for business purposes
- Interest is not related to tax-exempt income
- Transactions are at arm’s length, especially with related parties
Proper accounting method (accrual or cash basis) is followed
Exclusions: What Does NOT Qualify
The following are not deductible:
- Interest on loans taken for generating exempt income
- Penalties or fines imposed by law (even if called “interest”)
- Personal or non-business-related borrowings
- Capitalized interest in the year it’s incurred (can be depreciated over time)
Best Practices for Businesses
To ensure your interest deductions are compliant:
- Maintain proper documentation of all borrowing and usage
- Apply arm’s length pricing for related-party loans
- Track adjusted EBITDA monthly to estimate your 30% limit
Consult experts like ESMC Global before structuring complex finance or lease agreements
Why It Matters
Misinterpreting the rules around interest deduction UAE can lead to underreported tax and penalties. With corporate tax now active in the UAE, businesses must adopt a compliant and informed approach.
That’s where ESMC Global comes in. With deep expertise in UAE Corporate Tax Law, we help businesses align their financial reporting with regulatory standards—ensuring peace of mind and optimized tax positions.
Conclusion
Interest deductions are a valuable tool for reducing taxable income—but only when applied correctly. By understanding the qualifying conditions and limits under UAE law, businesses can plan their finances more effectively and avoid costly errors.
Looking for expert support on Corporate Tax compliance in the UAE? Connect with ESMC Global today.
