Not necessarily. Under Article 34 of Federal Decree-Law No. 47 of 2022, a loan between Related Parties must still carry an arm's length rate of interest. If it does not, the Federal Tax Authority can impute deemed interest income on one side of the transaction while restricting the deduction on the other, even though no cash interest ever changed hands.
Interest-free funding is a cash-flow decision, not a tax position. Many UAE groups fund subsidiaries, shareholders or sister companies without charging interest, often for genuine commercial reasons. That funding is still a Related Party transaction, and it is still expected to be priced the way two unrelated parties would have priced it. The FTA Transfer Pricing Guide (CTGTP1) and OECD financial-transactions guidance treat the rate, tenor, security and repayment terms as part of the same analysis. Related questions sit in intercompany guarantees and long outstanding related-party receivables.
Why do UAE groups use interest-free related party loans?
Interest-free funding between related entities is common and often has a legitimate rationale: seeding a new subsidiary before it generates revenue, smoothing group cash flow, supporting a related party through a temporary shortfall, or simply because no one drafted a loan agreement with commercial terms. None of these reasons is improper on its own. The issue is not why the loan is interest-free; it is whether the absence of interest has been tested and documented, or simply assumed to be acceptable because no cash changed hands.
Does "interest-free" mean no transfer pricing risk?
No. The arm's length principle applies to the terms of the transaction, not to whether a price was actually charged. A loan is a financial dealing like any other intercompany arrangement, and the price of that dealing is interest. If two unrelated parties in comparable circumstances would have negotiated a rate, tenor, security package and repayment schedule, the related-party loan is expected to reflect something similar. A zero rate is only defensible where the facts genuinely support it — for example a short-term, on-demand advance between entities with common treasury management where independent parties might also charge no interest.
What does Article 34 require for related party loans?
Article 34 requires transactions between Related Parties to be conducted at Market Value, applying the arm's length principle. Where a loan does not meet this standard, the FTA can adjust the taxable income of either party to reflect what would have applied between independent parties. For an interest-free loan, that can mean imputing deemed interest income to the lender, while the borrower may be permitted a corresponding notional deduction, subject to the general deductibility conditions and the interest limitation rules.
The first analytical question is whether the arrangement should be treated as debt at all. A simple comparison of interest rates is misleading until the credit profile of the borrower — standalone financial strength, group support, purpose of the funding, repayment profile, security, currency and market conditions — has been documented. How to record that functional story is covered in what a proper functional analysis looks like.
How exposed is a typical interest-free loan?
Exposure does not depend on whether cash interest was paid. An undocumented nil rate on a material related-party loan can produce deemed interest income for the lender, a restricted or interest-capped deduction for the borrower, and a Qualifying Free Zone Person issue where the funding sits between a 0% Free Zone entity and a 9% mainland related party. The AED 40 million Related Party disclosure threshold is a reporting trigger, not a de minimis exemption from Article 34. See what businesses need to report.
How does the interest deduction limitation interact with related-party loans?
Separately from the arm's length requirement, the general interest deduction limitation restricts net interest expense to 30% of adjusted EBITDA once it exceeds an AED 12 million de minimis threshold, with disallowed amounts carried forward for up to ten years. On top of this, specific anti-avoidance rules can deny a deduction for interest on a related-party loan where the arrangement does not serve a valid commercial purpose beyond obtaining a tax advantage. Where the related lender is itself subject to tax at 9% or higher, the law generally presumes less risk of such an advantage, but this presumption does not remove the underlying requirement to price the loan at arm's length in the first place. The mechanics are in UAE interest deduction limitation rules: the 30% EBITDA cap.
What about shareholder loans and quasi-capital?
Shareholder loans deserve particular care because the same terms that make a loan tax-efficient can also make it look like equity in substance. A loan with no fixed maturity, no interest, no security and no realistic expectation of repayment on demand starts to resemble a capital contribution rather than debt. If the FTA or the taxpayer's own analysis recharacterises the funding as quasi-capital, the consequences shift from an interest pricing question to a broader question about the true nature of the instrument, which can affect both parties' tax positions well beyond the interest line.
How should a UAE company document an interest-free related party loan?
-
A written intercompany loan agreement setting out principal, currency, tenor, repayment terms and any security.
-
A benchmarking analysis or reasoned basis for why a nil or below-market rate reflects what independent parties would have agreed.
-
Board or management approval showing the commercial rationale for the funding.
-
Evidence of the borrower's actual use of funds and repayment capacity at inception.
-
A record of how the loan is treated in each party's accounts, and whether it is disclosed as debt or reclassified.
-
Periodic review where circumstances change, such as the loan running long past its expected term.
-
A short written conclusion addressing whether the loan would be adjusted, and if so, by how much.
For Taxable Persons that meet the thresholds under Ministerial Decision No. 97 of 2023, this material belongs in the Local File.
Does this affect Qualifying Free Zone Person status?
Potentially. A Qualifying Free Zone Person must meet arm's length and adequate substance requirements to retain the 0% rate on qualifying income. An interest-free loan to or from a related party that is not priced or documented on an arm's length basis can undermine that position, particularly where the funding sits between a Free Zone entity and a mainland related party and the pricing gap shifts profit between the two regimes. The disclosure analysis for such loans should be run alongside, not instead of, the wider Related Party and Connected Persons review.
Who should review related party financing?
Treasury, finance and tax together. Treasury usually decides that a loan makes commercial sense; finance records it; and tax is left to explain, after the fact, why no interest was charged. Building the pricing analysis at the point the loan is advanced, rather than when the FTA asks about it, is the difference between a defensible zero rate and an unsupported one. Interest-free funding is not the problem. An interest-free loan with no contemporaneous analysis behind it is.
Frequently asked questions
Is every interest-free related party loan a problem?
Not automatically. Some interest-free arrangements can be supported on the facts, but the position needs a documented rationale rather than an assumption.
Can the FTA add notional interest income if none was charged?
Yes. Under Article 34, the FTA can adjust taxable income to reflect an arm's length price, which can include imputing interest that was never actually paid.
Does a related party loan below AED 40 million still need to be arm's length?
Yes. The AED 40 million figure is a disclosure threshold for the Related Party Transactions Schedule, not a materiality threshold for the arm's length requirement itself.
Can a genuinely short-term, on-demand advance be interest-free?
Potentially, where independent parties in comparable circumstances would also not charge interest, for example very short-term treasury sweeps. This still needs to be reasoned and documented.
What happens if a loan is recharacterised as equity?
The tax consequences shift from an interest pricing question to a broader question about the instrument's true nature, which can affect deductibility, withholding considerations and disclosure for both parties.
Primary sources and further reading
-
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses — Articles 30 and 34
How SBC Tax Consulting can help
SBC's transfer pricing team tests related-party loans against Article 34, documents why a nil or below-market rate is or is not supportable, and reconciles the result to the Local File and return. Corporate tax specialists then keep the same facts consistent with the interest limitation rules. Contact SBC before the next intra-group funding round or FTA review.
This publication is for general information only and does not constitute professional advice. Please consult your SBC advisor before acting on any matter covered here.