The UAE Federal Tax Authority published its Corporate Tax Guide on the Interest Deduction Limitation Rules (CTGIDL1) in April 2025, explaining how much interest and financing cost a business may deduct under Federal Decree-Law No. 47 of 2022, read together with Ministerial Decision No. 126 of 2023. The rules follow OECD BEPS Action 4 and pair a specific limitation with a general one.
Key takeaways
- The general rule caps a business's net interest deduction at the higher of 30% of adjusted EBITDA or an AED 12 million de minimis threshold; where net interest expenditure stays at or below AED 12 million, it is fully deductible.
- Interest disallowed under the general cap can be carried forward for up to 10 tax periods on a first-in, first-out basis.
- A separate specific rule (Article 31) can disallow the whole of the interest on a related-party loan used to fund dividends, capital contributions, share buy-backs or the acquisition of a related party.
- Banks, insurers, natural persons and qualifying infrastructure project persons sit outside the general cap; treasury companies, captive insurers and investment vehicles do not.
- Interest on debt agreed before 9 December 2022 is grandfathered from the general cap.
- A business that elects Small Business Relief cannot deduct or carry forward net interest expenditure at all.
What actually counts as "interest"?
"Interest" for tax purposes runs far wider than the interest line in the accounts. It captures any compensation for the use of money or credit, the profit element of a Shariah-compliant financing instrument, and a long list of payments that are economically equivalent to interest or incurred in raising finance — guarantee fees, arrangement fees, commitment fees (even on an undrawn facility), underwriting fees and early-repayment charges among them.
Foreign exchange, capitalised interest and hybrids each need care. Foreign-exchange movements on an interest payment are treated as interest, but exchange differences on the loan principal are not. Capitalised interest is not deducted when incurred; it is amortised over the life of the asset and fed into the EBITDA calculation over that period. On a hybrid instrument, the return is interest if the instrument is classified as a liability and a dividend if it is classified as equity — so the accounting characterisation drives the tax result.
In what order do the rules apply?
Deductibility is not a single test but a sequence, and the order changes the answer. The corporate tax rules are applied as follows:
- General principles of deductibility — the cost must be incurred wholly and exclusively for business, not be capital in nature, and fall in the relevant tax period.
- The arm's length principle for amounts paid to related and connected parties.
- The specific interest deduction limitation rule (Article 31).
- The general interest deduction limitation rule (Article 30), applied last, before only the tax-loss provisions.
Interest can clear the 30% cap and still be denied earlier in the sequence — for example because a related-party rate fails an arm's length review. A sound transfer pricing position is therefore a precondition, not an afterthought.
How does the 30% EBITDA cap work?
The 30% EBITDA cap (Article 30) limits a business's deductible net interest expenditure — interest expense less interest income — to the higher of 30% of adjusted EBITDA or an AED 12 million de minimis threshold. The cap engages only once net interest crosses that AED 12 million line, and works to stop groups eroding the UAE tax base with excessive debt.
| Question | Rule |
|---|---|
| Does the general cap apply at all? | Only where net interest expenditure exceeds AED 12 million in the tax period |
| Maximum deductible net interest | The greater of 30% of adjusted EBITDA or the AED 12 million de minimis threshold |
| Tax period shorter than 12 months | The AED 12 million threshold is prorated to the length of the period |
| Adjusted EBITDA is negative | It is treated as AED 0 |
| Interest above the cap | Carried forward up to 10 tax periods on a first-in, first-out basis |
Adjusted EBITDA starts from accounting income, strips out interest, depreciation and amortisation, and reverses the interest tied to grandfathered debt and qualifying infrastructure projects. Because the deductible amount is the greater of the two measures, a profitable company with heavy borrowing is protected by the 30% test, while a smaller borrower is protected by the flat AED 12 million floor.
The general cap bites only above AED 12 million of net interest, but the specific related-party rule carries no threshold — a single financing arrangement can lose its entire interest deduction regardless of size.
When can related-party interest be disallowed in full?
Article 31 targets a narrower risk: using intra-group debt to manufacture a corporate tax advantage. Interest on a loan from a related party is inadmissible where the loan directly or indirectly funds a dividend or profit distribution to a related party, a redemption or return of share capital to a related party, a capital contribution to a related party, or the acquisition of an ownership interest in a person who is or becomes a related party.
Two exceptions preserve the deduction. Interest stays deductible if the business can show that obtaining a corporate tax advantage was not the main purpose of the arrangement, or if the related-party lender is subject to an effective tax rate of at least 9% on the interest in its own jurisdiction. Both routes rest on evidence, so in practice SBC advisers build contemporaneous documentation of the commercial rationale at the time of the transaction, not when the FTA asks.
Who is exempt, and what is grandfathered?
Banks, insurance providers, natural persons and qualifying infrastructure project persons are outside the general limitation, though other deduction principles still apply to them. Treasury firms, captive insurers and investment vehicles remain subject to the cap, and a company owned by an individual is not exempt merely because its owner is. Debt agreed before 9 December 2022 is grandfathered, with the deductible amount limited to interest under the original loan terms. Businesses on Small Business Relief neither deduct nor carry forward net interest expenditure, and any earlier carry-forward is paused during the relief years.
Frequently asked questions
What is the 30% EBITDA rule in the UAE?
The 30% EBITDA rule is the general interest deduction limitation under Article 30 of the UAE Corporate Tax Law. It restricts a business's deductible net interest expenditure to the higher of 30% of its adjusted EBITDA or an AED 12 million de minimis threshold. Any interest above that ceiling is not lost permanently but carried forward for up to 10 tax periods.
Does the interest cap apply to every UAE business?
No. The general cap only engages where net interest expenditure exceeds AED 12 million in a tax period, so most smaller borrowers deduct their interest in full. Banks, insurers, natural persons and qualifying infrastructure project persons are also excluded from the general rule, although the specific rule and other deduction principles can still apply.
What is net interest expenditure?
Net interest expenditure is interest expense for the tax period less interest income, both measured under the tax definition of interest rather than the accounting one. It includes amounts economically equivalent to interest and costs of raising finance, and it excludes interest relating to grandfathered debt and qualifying infrastructure projects when testing the general cap.
Can disallowed interest be carried forward?
Yes. Interest disallowed under the general limitation is carried forward for up to 10 tax periods and used on a first-in, first-out basis, subject to the same cap in each later period. Interest denied under the arm's length principle or the specific rule, however, is disallowed outright and cannot be carried forward.
How SBC Tax Consulting can help
SBC reviews conventional and Islamic financing arrangements to confirm what qualifies as deductible interest, models your adjusted EBITDA and carry-forward position, and aligns intra-group loans and guarantees with the arm's length standard so they survive both the specific and general limitations. We also assess qualifying infrastructure and grandfathering positions and prepare you for FTA scrutiny. Explore our corporate tax advisory and transfer pricing services, or contact our team to review your financing structure before your next filing.
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.