If your business carries significant debt, the interest you pay is not automatically deductible for UAE Corporate Tax. The Corporate Tax Law caps how much net interest you can deduct, and a separate rule can deny a related-party loan its entire interest deduction regardless of size. Getting this wrong can inflate your taxable income and expose you to penalties.
This guide is written for UAE business owners, CFOs, finance teams, tax professionals, and accountants who need clarity before filing. You will learn how the 30% EBITDA cap works, when the AED 12 million de minimis threshold protects you, how the general and specific rules differ, and which businesses sit outside the cap entirely. We will also walk through a calculation, flag common mistakes, and answer the questions we hear most often.
The rules sit within Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which applies to financial years beginning on or after 1 June 2023, and are administered by the UAE Federal Tax Authority.
What counts as "interest" under UAE Corporate Tax
Before you can limit interest, you have to define it correctly. Under the Corporate Tax Law, interest is far wider than the interest line in your accounts.
The law defines interest as any amount accrued or paid for the use of money or credit. That includes discounts, premiums, the profit element paid on an Islamic financial instrument, other payments economically equivalent to interest, and any amounts incurred in connection with raising finance. In practice this captures items that many finance teams overlook, such as:
- Guarantee fees and arrangement fees
- Commitment fees, including on an undrawn facility
- Underwriting fees and early-repayment charges
The definition specifically excludes repayments of the principal amount. This broad definition is deliberate, because it stops businesses from relabeling interest as a "fee" to escape the limitation rules.
Foreign exchange, capitalised interest, and hybrids
Three areas need extra 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 feeds 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.
The deductibility sequence: where interest rules fit
Interest deductibility is not a single test. It is a sequence, and the order changes the answer. A cost can clear the 30% cap and still be denied earlier in the chain.
The rules apply in this order:
- General deductibility (Article 28): the cost must be incurred wholly and exclusively for business, not be capital in nature, and fall in the relevant tax period.
- Arm's length principle (Articles 34 to 36): amounts paid to related parties and connected persons must reflect market value.
- Specific interest deduction limitation rule (Article 31): targeted disallowance of certain related-party loans.
- General interest deduction limitation rule (Article 30): the 30% EBITDA cap, applied last, before only the tax-loss provisions.
Because Article 28 sits at the top, interest that is not genuinely for business purposes is denied before you ever reach the cap. And because the arm's length test comes next, a related-party interest rate that is too high can be adjusted or disallowed regardless of the EBITDA headroom. A defensible transfer pricing position is therefore a precondition, not an afterthought. You can strengthen this through SBC's transfer pricing services and by aligning terms with the OECD Transfer Pricing Guidelines and the FTA transfer pricing guidance.
Article 29: interest expenditure is deductible, subject to limits
Article 29 confirms the starting position. Interest expenditure is deductible in the tax period in which it is incurred, but only subject to Articles 28, 30, and 31. In other words, the law grants the deduction and then hands you three gatekeepers. Understanding each one is the difference between a clean filing and an unexpected add-back.
Article 30: the 30% EBITDA cap explained
The general interest deduction limitation rule in Article 30 is the headline measure. It limits a business's deductible net interest expenditure to the higher of 30% of adjusted EBITDA or the AED 12 million de minimis threshold set under Ministerial Decision No. 126 of 2023.
Net interest expenditure is interest expense for the period less taxable interest income, both measured using the tax definition of interest rather than the accounting one.
The cap only engages once net interest crosses the AED 12 million line. Below that, net interest is fully deductible. The rule exists to stop groups eroding the UAE tax base through excessive debt, which follows the approach of OECD BEPS Action 4.
| Question | Rule under Article 30 |
|---|---|
| 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 |
How adjusted EBITDA works in practice
Adjusted EBITDA starts from accounting income and strips out interest, tax, depreciation, and amortisation. It also excludes exempt income and reverses the interest tied to grandfathered debt and qualifying infrastructure projects, so those amounts do not distort the calculation.
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. Where adjusted EBITDA is negative, it is treated as zero, so the AED 12 million floor becomes the only available allowance.
A worked calculation
Assume a UAE company has net interest expenditure of AED 20 million and adjusted EBITDA of AED 50 million for a 12-month tax period.
- Step 1: Does the cap apply? Net interest of AED 20 million exceeds AED 12 million, so yes.
- Step 2: Calculate 30% of adjusted EBITDA. 30% of AED 50 million is AED 15 million.
- Step 3: Compare to the de minimis floor. The higher of AED 15 million and AED 12 million is AED 15 million.
- Step 4: Apply the cap. The company deducts AED 15 million now. The remaining AED 5 million is disallowed this period and carried forward for up to 10 tax periods on a first-in, first-out basis.
If the same company had a six-month tax period, the AED 12 million threshold would be prorated to AED 6 million for that comparison.
Article 31: when related-party interest is disallowed in full
The specific interest deduction limitation rule in Article 31 targets a narrower risk: using intra-group debt to manufacture a corporate tax advantage. It carries no de minimis threshold, so a single arrangement can lose its entire interest deduction regardless of size.
Interest on a loan from a related party is not deductible where the loan directly or indirectly funds any of these transactions with a related party:
- A dividend or profit distribution
- A redemption, buy-back, reduction, or return of share capital
- A capital contribution
- 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 demonstrate that obtaining a corporate tax advantage was not the main purpose of the arrangement, or if the related-party lender is subject to tax on the interest at a rate of at least 9% in its jurisdiction. Both routes rest on evidence, so build contemporaneous documentation of the commercial rationale at the time of the transaction rather than when the FTA asks.
The wholly and exclusively principle (Article 28)
Article 28 is the foundation for every deduction, including interest. Expenditure is deductible only if it is incurred wholly and exclusively for the business and is not capital in nature. No deduction is allowed for costs incurred to derive exempt income or for losses unconnected to the business.
For interest, this means the underlying borrowing must serve a genuine business purpose. If a loan funds a private or non-business purpose, the related interest fails at Article 28 and never reaches the EBITDA cap.
Arm's length and connected persons (Articles 34 to 36)
Interest paid to related parties and connected persons must meet the arm's length standard in Article 34. Related parties and control are defined in Article 35, which generally treats a 50% or greater ownership interest, or the ability to exercise significant influence, as creating a connection. Article 36 requires that payments to connected persons, such as owners and their relatives, match market value and are incurred wholly and exclusively for the business.
The practical consequence is clear. An intra-group loan priced above an arm's length rate can be adjusted down before the general cap applies, and the excess interest is disallowed outright rather than carried forward. Aligning loan terms with market evidence, and keeping the contract consistent with actual conduct, is essential. Our note on intercompany agreements and transfer pricing explains why the paperwork and the real behaviour must tell the same story.
Interaction with Small Business Relief (Article 21)
A business that elects Small Business Relief under Article 21 is treated as having no taxable income for the period. As a result, it neither deducts nor carries forward net interest expenditure while the relief applies. Any existing carry-forward balance is effectively paused during the relief years. This matters for planning, because electing the relief can strand interest that you might otherwise have used later.
Tax loss relief relevance (Article 37)
The interest limitation sits just above the tax-loss provisions in the deductibility sequence. That ordering matters because disallowed interest is not the same as a tax loss. Interest denied under the general cap is carried forward under its own 10-period rule, while tax losses are carried forward and offset under Article 37, subject to the 75% utilisation limit and the continuity conditions. Keeping the two pools separate in your records avoids double counting and supports an accurate return.
Who is excluded, and what is grandfathered
Not every taxable person is caught by the general cap. The following sit outside Article 30, although other deduction principles still apply to them:
- Banks
- Insurance providers
- Natural persons undertaking a business or business activity in the UAE
- Qualifying infrastructure project persons
Treasury companies, captive insurers, and investment vehicles remain subject to the cap, and a company is not exempt simply because its owner is a natural person.
Debt agreed before 9 December 2022 is grandfathered from the general cap, with the deductible amount limited to interest under the original loan terms. If those terms are later varied, the grandfathering can be affected, so review any amendments carefully.
The general rule versus the specific rule at a glance
| Feature | General rule (Article 30) | Specific rule (Article 31) |
|---|---|---|
| What it targets | Overall level of net interest | Related-party loans funding specific transactions |
| Threshold | Engages above AED 12 million net interest | No threshold |
| Measure | Higher of 30% adjusted EBITDA or AED 12 million | Full disallowance of the relevant interest |
| Carry forward | Yes, up to 10 tax periods | No, disallowed outright |
| Main escape | De minimis floor or EBITDA headroom | Main purpose test or 9% tax on lender |
Common financing arrangements affected
The rules reach a wide range of structures. Watch these closely:
- Shareholder and intra-group loans: exposed to both the arm's length test and Article 31.
- Acquisition financing: debt used to buy a related party can trigger full disallowance under Article 31.
- Cash pooling and treasury functions: treasury companies remain inside the general cap.
- Islamic financing: the profit element of a Shariah-compliant instrument is treated as interest, so sukuk returns and murabaha profit are tested in the same way as conventional interest.
Common mistakes and how to avoid them
- Using the accounting interest figure. The tax definition is wider. Rebuild net interest using the statutory definition, including fees economically equivalent to interest.
- Forgetting the de minimis floor. Many businesses assume the 30% test always applies. If net interest is AED 12 million or below, it is fully deductible.
- Treating a negative EBITDA as a positive allowance. Negative adjusted EBITDA is treated as zero, leaving only the AED 12 million floor.
- Ignoring Article 31 because a loan is small. The specific rule has no threshold. Size does not protect you.
- Overlooking short-period proration. A stub period shrinks the AED 12 million floor proportionally.
- Weak related-party documentation. Without contemporaneous evidence, the main purpose exception under Article 31 and the arm's length position under Article 34 are hard to defend.
Practical recommendations
Model your adjusted EBITDA and net interest early, well before the return deadline. Separate grandfathered and qualifying infrastructure interest from the rest so the calculation is clean. Confirm that intra-group rates are arm's length and that loan agreements match actual conduct. Track any disallowed interest as a distinct carry-forward pool with clear first-in, first-out dating. Retain the supporting records that Article 56 expects, and prepare the disclosures required at filing under Article 53, both of which are reinforced in the FTA general corporate tax guidance and the decisions published on the FTA legislation page.
Filing and payment are due within nine months of the tax period end, as confirmed on the Ministry of Finance corporate tax page and summarised on the UAE government corporate tax overview. Where financing structures are complex or under audit, our audit and dispute resolution team and international tax specialists can help you build a defensible position.
Filing and record-keeping expectations (Articles 53 and 56)
Article 53 requires a tax return that reflects your taxable income after all adjustments, including any interest add-back and carry-forward. Article 56 requires you to keep records that let the FTA readily verify that taxable income, generally for seven years. For interest, that means retaining loan agreements, fee schedules, EBITDA workings, grandfathering support, and the analysis behind any Article 31 position. Returns are filed through the EmaraTax platform, and clean workpapers make both filing and any later query far easier to handle.
Frequently asked questions
What is the 30% EBITDA rule in the UAE?
It is the general interest deduction limitation under Article 30 of the UAE Corporate Tax Law. It restricts deductible net interest expenditure to the higher of 30% of adjusted EBITDA or an AED 12 million de minimis threshold. Interest above that ceiling is carried forward for up to 10 tax periods rather than lost permanently.
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, insurance providers, 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?
It is interest expense for the tax period less taxable interest income, both measured under the tax definition of interest. It includes amounts economically equivalent to interest and finance-raising costs, and it excludes interest relating to grandfathered debt and qualifying infrastructure projects when testing the general cap.
Can disallowed interest be carried forward?
Interest disallowed under the general cap is carried forward for up to 10 tax periods 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 in Article 31 is disallowed outright and cannot be carried forward.
How is Islamic financing treated?
The profit element of a Shariah-compliant financing instrument is treated as interest for these rules. That means sukuk returns and similar profit payments are tested in the same way as conventional interest.
What happens if my adjusted EBITDA is negative?
Negative adjusted EBITDA is treated as AED 0. In that case the 30% measure is nil, so the AED 12 million de minimis floor becomes your only allowance under the general cap.
Conclusion
The UAE interest limitation rules pair a general 30% EBITDA cap, softened by an AED 12 million floor and a 10-period carry forward, with a specific rule that can deny related-party interest in full. Getting the deductibility sequence right, rebuilding net interest on the tax definition, and keeping strong related-party evidence are what separate a clean filing from a costly add-back. Exclusions and grandfathering can help, but only if you identify them correctly and document them well.
Before your next return, model your adjusted EBITDA and net interest position, test both the general and specific rules, and confirm your carry-forward pool is accurately dated. If you want a second set of eyes on your financing structure, talk to the SBC team or explore our corporate tax advisory services to review your position before filing.
This publication is for general information only and does not constitute professional advice. Please consult a qualified advisor before acting on any matter covered here.
15/7/25 Ministerial Decision 173
Page Title: Ministerial Decision 173 of 2025: UAE Fair-Value Property Depreciation
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Meta Description: Learn how Ministerial Decision No. 173 of 2025 lets UAE businesses claim tax depreciation on IAS 40 fair-value investment property, with examples and steps.
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Secondary Keywords: realisation basis Article 20(3), UAE corporate tax depreciation election, tax written-down value, investment property claw-back, 4 percent depreciation UAE
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