Interest is one of the most common financial transactions in business—but not every interest-related payment qualifies for tax deductions. Under the UAE’s evolving tax regime, the definition of interest is broader than traditional bank loan interest.
In this article, ESMC Global explains how “interest” is interpreted under the UAE Corporate Tax Law, what types of interest-related payments are deductible, and what businesses must look out for to remain compliant.
How is "Interest" Defined in UAE Corporate Tax Law?
The UAE Corporate Tax Law adopts a broad approach to what constitutes “interest.” It includes not just interest paid on loans, but also any economically equivalent payments made in connection with the use of money or credit.
According to Article 1 of the law, interest includes:
- Amounts accrued or paid for the use of money or credit
- Discounts and premiums on debt instruments
- Profit paid in respect of Islamic financial instruments
- Other financing-related payments that resemble interest
- Fees incurred when raising finance (e.g., loan processing fees)
Note: Repayment of the loan principal is not considered interest and is therefore not deductible.
Examples of Deductible Interest in UAE
- Bank Loans: Standard interest paid on loans for business use.
- Overdrafts: Monthly charges for overdraft facilities used to cover operational expenses.
- Finance Leases: The finance portion of lease payments may count as interest.
- Islamic Financing (e.g., Murabaha, Ijara, Sukuk): Profit components in these contracts are often treated as interest equivalents.
- Discounts or Premiums on Bonds: The cost spread over the bond’s life is treated as interest.
ESMC Global regularly advises clients on how to identify these interest components in their financial records.
What is NOT Considered Interest?
Despite the broad definition, certain payments may appear similar to interest but don’t qualify for deduction:
- Penalties or fines on statutory dues (like unpaid tax)
- Trade discounts or loyalty incentives unrelated to borrowing
- Equity dividends or profit-sharing that are not debt-related
Capitalized interest, until it’s amortized through depreciation
Key Considerations for UAE Businesses
To stay tax-compliant, businesses must:
- Classify each financial transaction correctly
- Understand the accounting treatment under IFRS or IFRS for SMEs
- Ensure interest is tied to taxable business activity (not exempt income)
- Maintain documentation for loans, leases, and Islamic finance structures
At ESMC Global, we work closely with businesses across the UAE to implement these best practices.
Why This Matters
The definition of interest under UAE Corporate Tax Law is intentionally broad to prevent tax avoidance through alternative financing methods. Knowing what qualifies and how to document it properly is essential for tax compliance and financial health.
Need help decoding complex financial terms in your tax reports? Reach out to ESMC Global — your trusted partner in UAE Corporate Tax compliance.
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.
