Optimizing Interest Deductions in UAE Corporate Tax Planning

The new Corporate Tax regime in the UAE has put many deductible expenses under debate. One of them is interest expenditure. Although it is considered a deductible expense, there are some limitations. Articles 29,30 and 31 sheds light on this topic.

Keep reading this blog post as we will discuss the rule of interest expenditure under the law of Corporate Tax in UAE. Let’s begin:

Article 29 – Interest Expenditure: A Brief Overview

Deductibility of Interest: This article allows for the deduction of interest expenses incurred during the tax period, subject to the provisions of Article 28 and Articles 30 and 31. This inclusion is significant for businesses with considerable financing costs.

Article 30 – General Interest Deduction Limitation Rule: Key Points

Deduction Cap: The deduction for Net Interest Expenditure is capped at 30% of a business's EBITDA for the relevant tax period, excluding any income exempt under Article 22.

Definition of Net Interest Expenditure: This is the amount by which the interest expense incurred exceeds the taxable interest income in the same period. It also includes any carried-forward net interest expenditure.

Exemption Criteria: The 30% limitation doesn't apply if the net interest expenditure for the period doesn't exceed a specified amount.

Carry Forward Rule: If any net interest expenditure is disallowed under this rule, it can be carried forward for deduction in the next ten tax periods in the order it was incurred.

Exclusions: Certain entities, like banks and insurance providers, are excluded from these rules.

Article 31 – Specific Interest Deduction Limitation Rule: An Insight

Restrictions on Deductions: No deductions are allowed for interest expenses on loans obtained from a related party for specific transactions, including dividend payouts, share capital transactions, and acquisitions involving related parties.

Exemption Conditions: If a taxable person can demonstrate that the loan's primary purpose wasn't to gain a corporate tax advantage, this rule may not apply.

Tax Rate Consideration: A corporate tax advantage is not deemed to arise if the related party is subject to corporate tax or similar tax on the interest at a rate not less than the specified rate in the UAE.

Implications for Businesses

Strategic Financial Planning: These articles necessitate strategic planning regarding financing decisions and interest expenditure.

Compliance and Documentation: Accurate record-keeping and compliance with these provisions are essential.

Seek Professional Advice: Due to the complexity of these rules, professional guidance is highly recommended.

The core purpose of the above guidelines is to design a fair tax system in the UAE. Tax calculation as per these rules will prevent unnecessary deductions while keeping the genuine expenses in consideration.

Undoubtedly, tax rules are sometimes very difficult to understand. Get in touch with Virtegrated Minds for all your taxation needs. We will make the complex process easier for you.