UAE Corporate Tax Interest Deduction Limits Explained

UAE Corporate Tax interest deduction limits can restrict a company’s deduction even when the borrowing is genuine and recorded correctly. Apply the ordinary business-purpose and arm’s-length tests first, then the specific rule for certain Related Party financing, and finally the general cap. For a 12-month Tax Period, the general rule permits the higher of AED 12 million or 30% of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA). Any excess requires a supported carry-forward schedule.

What are the UAE Corporate Tax interest deduction limits?

Articles 28 to 31 of Federal Decree-Law No. 47 of 2022 create a sequence rather than one simple percentage. Article 29 says Interest expenditure may be deductible in the Tax Period in which it is incurred, but only subject to the ordinary deduction rule, the General Interest Deduction Limitation Rule and the Specific Interest Deduction Limitation Rule.

That distinction matters. A cost that fails the business-purpose test or the arm’s-length principle does not become deductible because the company has unused capacity under the 30% rule. Likewise, a Related Party loan caught by Article 31 must pass that targeted rule before its Interest enters the general calculation.

The legislation is binding. Ministerial Decision No. 126 of 2023 supplies the detailed finance-cost perimeter, AED 12 million de minimis amount and adjusted EBITDA calculation. Federal Tax Authority (FTA) Guide CTGIDL1 explains how the authority interprets and administers those provisions; it is useful authority guidance, but it is not legislation.

For the wider profit-to-tax framework, start with the UAE Corporate Tax Guide. This article isolates the financing question: which costs enter the rules, how the cap is calculated and what evidence should support the return.

Use the four-step deduction sequence

1. Test ordinary deductibility. Confirm that the expenditure was incurred wholly and exclusively for the Taxable Person’s business, allocate mixed-purpose costs and apply the other Article 28 restrictions.
2. Apply market-value and arm’s-length rules. Interest paid to a Connected Person or Related Party should reflect the actual transaction and an arm’s-length price. The excess over a supportable amount is not preserved for the later cap.
3. Apply the Specific Interest Deduction Limitation Rule. Test Article 31 where Related Party funding finances one of the listed equity or distribution transactions.
4. Apply the General Interest Deduction Limitation Rule. Calculate Net Interest Expenditure, adjusted EBITDA and the available deduction for the Tax Period.

This order follows FTA Guide CTGIDL1. It prevents a common spreadsheet error: placing every finance cost into the general cap before removing amounts already disallowed under another provision.

Interest includes more than loan coupons

The Corporate Tax definition covers amounts accrued or paid for the use of money or credit, discounts, premiums, profit on an Islamic financial instrument, economically equivalent payments and amounts incurred in raising finance. Ministerial Decision No. 126 gives practical categories that can enter the calculation.

• interest components of performing and non-performing debt instruments;
• guarantee, arrangement, commitment and similar finance-raising fees;
• the interest-equivalent component of Islamic financial instruments;
• the finance element of finance and non-finance lease payments under the Decision’s method;
• foreign-exchange gains and losses accruing from Interest;
• qualifying hedge components directly connected with raising finance; and
• capitalised Interest when the related amount is recognised through depreciation or amortisation under the applicable accounting treatment.

Principal repayment is not Interest. Nor should every exchange difference, lease payment or derivative movement be placed into the schedule without tracing it to the statutory definition. The practical control is to reconcile loan agreements, bank charges, lease schedules, hedge documentation and general-ledger accounts to one finance-cost register.

Calculate Net Interest Expenditure first

Net Interest Expenditure is broadly the amount by which Interest expenditure exceeds taxable Interest income for the Tax Period. The calculation also takes account of eligible amounts carried forward from earlier Tax Periods. Items already disallowed under other Corporate Tax provisions and scoped statutory exceptions require separate treatment rather than being blended into the current-period net figure.

A company therefore needs both sides of the schedule. Looking only at bank-loan expense can overstate Net Interest Expenditure where the same Taxable Person earns taxable Interest income. Conversely, relying on the income statement’s single “finance costs” line can omit arrangement fees, lease finance components or relevant foreign-exchange movements.

Prepare the schedule by legal entity. A consolidated management report is not automatically the calculation for a Taxable Person, and a Tax Group has additional rules. Intercompany financing also needs consistent balances and pricing on both sides. The UAE Related Party transactions guide explains the wider controlled-transaction evidence.

How the AED 12 million and 30% EBITDA tests work

For a 12-month Tax Period, Article 8 of Ministerial Decision No. 126 sets AED 12 million as the de minimis amount. If Net Interest Expenditure does not exceed AED 12 million, the General Interest Deduction Limitation Rule does not restrict it, although the earlier deduction tests still apply.

If Net Interest Expenditure exceeds AED 12 million, the deductible amount under the general rule is the higher of:

• AED 12 million; or
• 30% of adjusted EBITDA for the Tax Period.

The two figures are alternatives, not cumulative allowances. A company does not deduct AED 12 million and then add 30% of adjusted EBITDA. Where the Tax Period is longer or shorter than 12 months, the AED 12 million amount is adjusted in proportion to the length of that Tax Period.

This is also not a revenue threshold. Revenue may influence the wider tax computation, but it does not replace Net Interest Expenditure or adjusted EBITDA in this test.

Adjusted EBITDA is a tax calculation

Adjusted EBITDA for this rule may differ from EBITDA used in a banking covenant, valuation or management pack. Article 9 of Ministerial Decision No. 126 starts from Taxable Income calculated under Article 20 before applying the general Interest limitation and tax-loss provisions. It then requires specified adjustments.

The principal add-backs include current-period Net Interest Expenditure before brought-forward amounts, depreciation and amortisation taken into account in Taxable Income, and specified Interest connected with historical financial assets or liabilities. Interest relating to a Qualifying Infrastructure Project is dealt with under its separate rules. If the calculation produces a negative amount, adjusted EBITDA is floored at zero.

Do not copy accounting EBITDA into the Corporate Tax return. Reconcile the trial balance to Taxable Income, identify every statutory adjustment and retain the bridge. The bridge should also show how exempt income, non-deductible costs and capitalised Interest were treated.

Worked example: a 12-month Tax Period

Assume a UAE trading company has a 12-month Tax Period. After the ordinary deduction, arm’s-length and specific-interest tests, its current Net Interest Expenditure is AED 20 million. Its adjusted EBITDA under Article 9 is AED 30 million. Assume no brought-forward Interest and no special exception applies.

1. Thirty per cent of AED 30 million is AED 9 million.
2. The statutory comparison is therefore AED 9 million against AED 12 million.
3. The higher amount is AED 12 million, so the general rule permits a deduction of AED 12 million for the period.
4. The remaining AED 8 million is disallowed for that Tax Period and enters the carry-forward schedule, subject to Article 30.

Change adjusted EBITDA to AED 60 million and 30% becomes AED 18 million. The higher amount is then AED 18 million, leaving AED 2 million to carry forward. The example demonstrates the arithmetic only. A real computation must first establish the correct Interest perimeter, Taxable Income adjustments, Related Party treatment and any exception.

Carry forward disallowed Net Interest Expenditure

Article 30 allows Net Interest Expenditure disallowed by the general rule to be carried forward for up to the subsequent 10 Tax Periods. FTA Guide CTGIDL1 says utilisation follows the order in which the amounts were incurred, using a first-in, first-out approach, and remains subject to capacity under the rule in the later period.

The carry-forward belongs to the same Taxable Person. It cannot simply be assigned to another company. Where a subsidiary with a brought-forward balance joins a Tax Group, the guide explains that utilisation is restricted to Tax Group Taxable Income attributable to that subsidiary rather than the group’s entire income.

Maintain a vintage schedule showing origin period, original disallowance, amounts used, remaining balance and final potential utilisation period. The schedule should survive changes in accounting systems, advisers and group structure. A deferred-tax entry or prior return balance is not, by itself, a complete supporting file.

When the specific Related Party rule applies

Article 31 targets Interest on a loan obtained directly or indirectly from a Related Party where the funds finance one of four listed transactions with a Related Party: a dividend or profit distribution; redemption, repurchase, reduction or return of share capital; a capital contribution; or acquisition of an ownership interest in a person who is or becomes a Related Party after the acquisition.

The rule contains a main-purpose test. It does not mean that every shareholder or group loan is automatically disallowed. The Taxable Person must be able to demonstrate, on the facts, that the main purpose of obtaining the loan and carrying out the relevant transaction was not to gain a Corporate Tax advantage. The law also contains a rebuttable treatment linked to the Related Party lender’s effective tax rate.

Evidence should cover the funding decision, commercial alternatives, timing, board papers, cash flow, lender taxation, agreement, repayment terms and actual use of proceeds. A later narrative prepared only for the return is weaker than documents created when the financing was approved.

Exceptions need their own file

The general rule does not apply to a Bank, an Insurance Provider or a natural person undertaking Business or Business Activity in the UAE. The natural-person exception does not extend to a company merely because one individual owns it. FTA guidance expressly distinguishes a sole establishment operated directly by a natural person from a one-person juridical company.

Ministerial Decision No. 126 also deals with Net Interest Expenditure attributable to debt instruments or liabilities whose terms were agreed before 9 December 2022. Later changes to relevant terms can alter that treatment. Preserve the original agreement, drawdown mechanics, amendments, hedge documents and a calculation isolating the eligible amount.

A further exception exists for a Qualifying Infrastructure Project Person’s Net Interest Expenditure relating to a Qualifying Infrastructure Project. Article 14 imposes cumulative conditions, including public benefit, qualifying UAE services, limits on disposal, expected asset life, UAE location and UAE-arising Interest. Ordinary property development or work merely connected with infrastructure should not be assumed to qualify.

These exceptions remove amounts from the general cap only within their scope. Ordinary business-purpose, specific-interest and other Corporate Tax rules can still matter.

Finance-to-return evidence checklist

1. List every loan, credit line, lease, Islamic instrument, guarantee, hedge and capitalised borrowing cost by legal entity.
2. Reconcile principal, Interest, fees, income, foreign-exchange movements and closing balances to the ledger and counterparties.
3. Document the business purpose and trace how borrowed funds were used.
4. Identify Connected Persons and Related Parties; test market value and the arm’s-length principle.
5. Apply the Article 31 specific rule to each potentially listed transaction before the general cap.
6. Separate historical liabilities and potential Qualifying Infrastructure Project amounts with evidence for every condition.
7. Calculate current Net Interest Expenditure, then reconcile it to the Corporate Tax computation.
8. Build adjusted EBITDA from Taxable Income rather than importing management EBITDA.
9. Compare the proportionately adjusted de minimis amount with 30% of adjusted EBITDA.
10. Record the current deduction, add-back and each carry-forward vintage.
11. Check Tax Group entry, exit or restructuring effects before assuming balances remain usable.
12. Retain the calculation, agreements, board papers, lender evidence and review approval with the Tax Period file.

The general expense framework is covered in UAE deductible expenses. Interest needs this additional schedule because accounting recognition, transfer pricing, funding purpose and the statutory cap interact.

Frequently asked questions

Is all bank interest deductible for UAE Corporate Tax?

No. A bank loan may be genuine, but the Interest must still pass the ordinary deduction rules and the General Interest Deduction Limitation Rule. The Article 31 specific rule is mainly relevant to qualifying Related Party financing arrangements.

Is AED 12 million an automatic extra deduction?

No. For a 12-month Tax Period it is the de minimis amount and, above that level, one side of the comparison with 30% of adjusted EBITDA. The company uses the higher amount; it does not add the two.

Does the rule apply when Net Interest Expenditure is below AED 12 million?

The general cap does not restrict Net Interest Expenditure that does not exceed AED 12 million for a 12-month Tax Period. Other rules can still deny or adjust an amount, including business-purpose, capital, arm’s-length and specific Related Party provisions.

Can unused Interest capacity be carried forward?

The legislation carries forward disallowed Net Interest Expenditure, not unused EBITDA capacity. The disallowed amount may be used in the subsequent 10 Tax Periods when the statutory conditions and capacity permit.

Does a Free Zone company escape the Interest limits?

No automatic exclusion applies merely because a juridical person is established in a Free Zone. Its status, income and deductions require analysis under the Corporate Tax Law, Free Zone rules and the Interest limitation provisions.

Does the natural-person exception cover a single-owner company?

No. FTA guidance states that a juridical person remains subject to the general rule unless another exception applies, even where one natural person owns the company.

Official sources checked on 28 September 2026

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, as amended, particularly Articles 28–31, 34, 36 and 55. Binding law on deduction order, the general and specific rules and record retention.
• Ministerial Decision No. 126 of 2023, particularly Articles 2–9 and 11–14. Binding detail on Interest components, the AED 12 million amount, adjusted EBITDA and scoped exceptions.
• FTA Corporate Tax Guide CTGIDL1, Interest Deduction Limitation Rules, April 2025. Non-binding authority guidance on the calculation sequence, examples, carry-forward and exceptions.

Turn the finance ledger into a defensible tax schedule

The result should connect each financing instrument to its business purpose, legal counterparty, accounting entry, arm’s-length support, statutory test and Corporate Tax return adjustment. The MP Elites team can review the Interest perimeter, Related Party funding, adjusted EBITDA bridge and carry-forward schedule before filing or remediation.

Explore our UAE Corporate Tax services or book a strategic consultation with the MP Elites team.

This article provides general information only and is not legal, tax or accounting advice. Apply the current legislation and FTA materials to the relevant Taxable Person, financing arrangement, Tax Period and evidence.