As the tax environment in the UAE continues to change, the introduction of federal Corporate Tax (CT) has transformed the way companies run their financial operations. With companies shifting to this new paradigm, the ability to grasp interest deductibility can be key in both polishing a tax position and staying within the lines. The guts of these provisions lie in the interest deduction limitation rule, a provision to limit excessive debt financing that harmonizes with international standards. This blog is a guide on interest deduction limitation rules and includes the interpretation of “interest limitation rule” in UAE, which affects determination of taxable income. We take inspiration from some of the recent updates, such as FTA (Federal Tax Authority) released Corporate Tax Guide CTGIDL1 in April 2025, to discuss the role played by The General Interest Deduction Limitation Rule UAE and how it influences financial strategies otherwise.
The Purpose of the Interest Deduction Limitation Rule
UAE’s CT Law, Federal Decree-Law No. 47 of 2022 which is effective as from June 1, 2023, seeks to counter base erosion and profit shifting (BEPS) by restricting the tax benefits of debt in comparison to equity. The Article contains a restriction on the deduction of interest expenses from gross income, known as Interest Deduction Limitation Rule, repeated in Article 30 for the general clause and in article 31 when a particular calculation modality is demanded, it aims to avoid that, by cynically characterizing their payments they transfer profits out of national territory, or by overvaluing it they import costs into the domestic market. We share BEPS Action 4 by the OECD, in support of fair tax paying but not hampering legitimate business financing.
This spells a tricky balancing act for businesses: Article 28 retains the deductibility of interest on loan finance, but under strict limits. The FTA’s Middle East Tax Alert on the guidance in respect of these rules issued in May 2025 highlights the significance of these rules in a post-CT world, failure to comply with which could result audits and penalties. According to the determination of taxable income guide (CTGDTI1), these limitations are made following some initial adjustments to accounting income and thus form a structured method for calculating taxable profits.
Breaking Down the General Interest Deduction Limitation Rule (GIDLR)
The foundation of the Interest Deduction Limitation Rule is the General Interest Deduction Limitation Rule UAE (GIDLR) as stipulated in Article 30 of CT Law and further discussed through Ministerial Decision No. 126 of 2023. Under GIDLR, the Net Interest Expenditure (NIE) of a Taxable Person or its Saudi branches can be reduced up to the higher of: (i) 30% of the aggregate tax-adjusted EBITDA; and ii.
30% of tax adjusted EBITDA: This represents Earnings Before Interest, Taxes, Depreciation and Amortization adjusted for taxes (e.g. excluding non-taxable income and adding back non-deductible expenses).
AED 12 million de minimis threshold: If NIE is less than or equal to this, no limitation applies.
Key Calculation Steps
To illustrate, consider a simplified example from the FTA’s guide:
| Component | Amount (AED) | |
| Accounting Income | 50,000,000 | |
| Adjustments (e.g., exempt income exclusion) | +5,000,000 | |
| Tax-Adjusted EBITDA | 55,000,000 | |
| 30% of EBITDA | 16,500,000 | |
| De Minimis Threshold | 12,000,000 | |
| Allowable Deduction Limit | 16,500,000 | |
| Actual NIE | 18,000,000 | |
| Deductible NIE | 16,500,000 | |
| Carry-Forward Disallowed | 1,500,000 |
In such case, NIE of AED 1.5 million in the year cannot be deducted from taxable income but you can carry it forward for the next 10 tax years (with other limitations). This carry-forward provision is flexible, but it is not retroactive.
What Constitutes “Interest”?
The Tax guide on interest expense limitation rules states that the definition of “interest” is much broader than loans. The explanation of it can be traced in the CT once more according to Article 1 of CT:
- Discounts or payments for the use of money or credit (loan interest).
- Discounts/premiums on debt instruments.
- Earnings of Islamic financing (such as Murabaha).
- Payments of a substantially similar nature, such as late payment fees.
Of significance, the FTA indicates preference for CT Law definition as compared to IFRS classifications. Interest comprising part of the cost (e.g., to construct) an asset is not deductible at all initially but may be deducted through its amortization over the life of the capital asset with the annual deduction subject to GIDLR.
The Specific Interest Deduction Limitation Rule (SIDLR)
The Specific Interest Deduction Limitation Rule under Article 31 which is a counterpart of GIDLR applies to related-party or connected-person financing. In this case, interest is altogether disallowed if the taxpayer receives a CT advantage primarily in connection with holding or disposing of money as being for instance when:
- Exempt dividends or distributions.
- Operations with tax base decreasing effect (purchase of shares for resale).
Under that “main purpose test,” the taxpayer has the burden of demonstrating legitimacy. A safe harbor also applies if the lender is a non-domiciled person subject to ≥9% tax. FTA’s 2025 April guide supplies 24+ pages of them, emphasizing that SIDLR comes before GIDLR in the deductions order.
A Step-by-Step Determination of Taxable Income Guide
For clarity, we’ve detailed the sequential application below as per FTA interest limitation in the UAE guidance:
- General Deductibility (28): Is the expenditure at the cost of doing business: (non-capital, non-personal).
- Arm’s Length Principle (Art. 34): Renegotiate non-market rates to be fair value.
- SIDLR (31): Deny tax avoidance purpose.
- GIDLR (Clause 30): Limit the rest of the NIE to 30% EBITDA or AED 12M.
This order then provides a thorough examination, coupling with the broader measurement of taxable income.
Exceptions and Exclusions: Who Gets Relief?
Not all taxpayers are necessarily impacted by the full scope of Interest Deduction Limitation Rule:
- Banks and Insurers: Outside the scope of GIDLR calculations between tax groups.
- Eligible Infrastructure Projects:None, if long-term and qualifying (e.g., public purpose).
- Historical Debt:Instruments issued prior to December 9, 2022, are grandfathered.
- Small Business: The benefit under Article 21 could have the trickle-down effect of some relief.
- General Extractive/Non‐Extractive Corporations: Partial exemptions for government owned corporations.
Small-and Medium Sized Enterprises In a positive development for SMEs, the Middle East Tax Alert notes that de minimis NIE less than AED 12M is not subject to GIDLR at all.
Carry-Forward Mechanics and Interaction with Other Provisions
The disallowed NIE under GIDLR is carried forward indefinitely but may be used in not more than 10 periods commencing with the year in which such loss or expense occurred and will have preference over current-year losses. It interacts with tax losses but cannot apply to income that is exempt. For taxing bodies, the calculations are aggregated (except for financial institutions.)
In the taxable income determination guide, the FTA refers to unrealized profits/losses as well as foreign PE rebates not as a pre-GIDLR adjustment but exclusively adjustment even before it.
Professional Support by CBM Consultants:
CBM Consultants is vital to assist companies in adherence to the General Interest Deduction Limitation Rule for UAE Corporate Tax. We help by running the numbers on the financing structures, make calculations for what’s eligible for interest deductions under 30% of EBITDA and determine how many non-deductible interests carried forward stuff there is. Our experts make certain that intercompany indebtedness and other debts comply with the interest limitation rule and FTA regulations. Our professionals also offer consulting based on the determination of taxable income guide and generate audit-ready documentation. Have strategic plans for expenses that are deductible to support companies in remaining compliant, while at the same time managing minimal tax responsibilities.
Practical Implications for Businesses:
With the introduction of the interest limitation rule, ahead of filings businesses based, will need to engage with this as a result. For multinationals with intra-company lending, transfer pricing studies would need to be done. It is to ensure that rates were on an arm’s length basis. Real estate companies that capitalize interest must be very precise with amortization. The FTA’s guide cautions that “interest-like” payments could be audited if they are misclassified, advocating strong documentation.
Recent alerts have focused on the need to tailor financing structures to obtain deductions. Non-residents having UAE PEs should gate interest linked to state-sourced income.
Conclusion
It’s more than a limitation; it is possibly the key to sapient tax planning. Understanding of the GITD Limitation Rule UAE and its interaction with SIDLR will help business optimize efficiency and risk. Refer to the FTA Tax guide interest deduction limitation rules and seek advice from tax advisors for specific advice. As the UAE consolidates its position as a global hub, pro-active compliance with these regulations will be the basis of financial strength.
