FTA Publishes New Guide on Interest Deduction Limitation Rules under UAE Corporate Tax Law
I. Context and Purpose
On April 7, 2025, the UAE Federal Tax Authority (FTA) issued a new guide titled “Corporate Tax Guide | Interest Deduction Limitation Rules (CTGIDL1 – April 2025)”, which provides comprehensive clarification on the application of Art. 30 and 31 of Federal Decree-Law No. 47 of 2022 concerning the deductibility of interest expenses. The guide reflects the UAE’s intention to bring its corporate tax regime in line with international best practices, particularly the OECD’s BEPS (Base Erosion and Profit Shifting) framework, specifically Action 4, which addresses excessive interest deductions.
II. General Limitation under Art. 30 – The 30% EBITDA Rule
At the core of the new guidance lies the general rule that limits the deductibility of net interest expense to 30% of the taxpayer’s adjusted EBITDA. This limitation aims to ensure that businesses cannot erode their taxable income through excessive debt financing. Any disallowed interest exceeding the 30% cap may be carried forward for up to ten years, allowing taxpayers to recover the deduction in future profitable periods.
Notably, exemptions apply to certain categories of taxpayers, particularly financial institutions such as banks and insurance companies, as well as standalone entities that are not members of multinational groups. Moreover, the FTA introduces a de minimis threshold: if a taxpayer’s net interest expense does not exceed AED 12 million in a given tax year, the EBITDA-based limitation does not apply. This relief measure is intended to reduce the compliance burden for SMEs and entities with low leverage.
III. Related Party Financing under Art. 31
The guide also focuses on related party transactions, where special anti-avoidance rules under Art. 31 may disallow interest deductions if the main purpose of the transaction is to secure a corporate tax advantage. However, the FTA clarifies that such disallowance does not apply if the taxpayer can demonstrate valid commercial reasons for the loan and if the interest income is taxed at a minimum rate of 9% in the hands of the recipient. These provisions strike a balance between preventing abuse and preserving legitimate intra-group financing practices.
IV. Free Zone Entities and Interaction with Other Provisions
Free Zone Persons are also subject to the interest limitation rules when it comes to non-qualifying income, which remains fully taxable under the corporate tax regime. While qualifying income continues to benefit from the 0% tax rate, interest expenses associated with other types of income are subject to the same deductibility rules as those applied to mainland entities.
The guide also briefly addresses the interplay between the interest limitation rules and other provisions of the UAE Corporate Tax Law, including transfer pricing regulations, thin capitalization considerations, and the general anti-abuse rule set out in Art. 50. This highlights the importance of viewing interest deductibility within the broader context of the UAE’s corporate tax framework.
V. Practical Implications
The guidance has significant practical implications. Businesses operating in the UAE must carefully assess their current and future financing arrangements, particularly intra-group loans and third-party borrowings. Robust documentation will be essential to support the commercial rationale of financing decisions and ensure compliance with both domestic and international tax requirements. Monitoring interest expenses relative to EBITDA will also become a critical part of tax planning going forward.
VI. Conclusion
With this new guidance, the FTA delivers an important contribution to the development of a transparent, predictable, and internationally aligned tax environment in the UAE. It provides businesses with the necessary clarity to navigate interest deductibility rules while supporting the UAE’s efforts to prevent tax base erosion. Companies are well advised to incorporate these rules into their tax planning strategies to avoid adverse consequences and to benefit from the flexibility that the legislation offers when applied correctly.
