Article 29 of Chapter Nine on Deductions in the Federal Decree Law No. 47 of 2022 (“Decree Law”) details the deductions around Interest expenditure provisions. It states that interest expenditure is deductible in the same Tax Period in which it is incurred. The Decree Law provides for a general as well as specific interest deduction rule.
While Article 30 of the Decree Law deals with the General deduction limitation rule, Article 31 provides the specific deduction rule for interest expenses.
General Interest Deduction Limitation Rule
Article 30 provides a Net Interest Expenditure deduction of up to 30% of the EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) after excluding the exempt incomes defined in the Decree Law. It is also important to understand that Net Interest Expenditure is the aggregate of interest expenses for the current tax period and net interest expenses carried forward from previous tax periods, which is then deducted by the interest income earned, if any, for the current tax period.
Interesting to note that the general limit of 30% would not apply if the Net Interest Expenditure for a tax period is less than or equal to AED 12 million, as stated in the Ministerial Decision no. 126 of 2023 on the General Interest Deduction Limitation rule. The Decision also states that where the Net Interest Expenditure exceeds AED 12 million, the higher AED 12 million and 30% of EBITDA will be allowed as a deduction as per the limitation rule above.
Carry forward of Net Interest Expenditure
The Net Interest Expenditure remaining after deducting the 30% of the EBITDA limit is allowed to be carried forward for subsequent ten tax periods and is deductible in the order of such interest incurred in accordance with the limitation rule.
Specific Interest Deduction Limitation Rule
The Decree Law also provides for a special Interest Deduction Rule. This is mainly for transactions that involve related parties. A classic example is where a taxable person obtains a loan from a related party to carry out transactions, as listed in Article 31 of the Decree Law, with a related party. Examples are dividend distribution, capital contribution, investing in the ownership interest of a related party or a person who would become a related party after acquisition, and so on.
Exception to the specific Interest Deduction Limitation rule
Article 31(2) and (3) of the Decree Law considers that not all transactions could aim for a corporate tax advantage. If it can be proven that the main intention of obtaining a loan from the related party is not for the purpose of gaining a corporate tax advantage, then such interest on the loan would be allowed for deduction. Further, if the related party, to whom the interest is paid, is subjected to corporate tax or similar nature of tax in its foreign jurisdiction at a minimum rate of 9% or more, the interest expense on such loan will be allowed as a deduction as it would be deemed that no corporate tax advantage is sought.
It is important to note that irrespective of how interest is classified and treated under the applicable accounting standards, any component of interest or other payments economically equivalent to interest would attract the provisions of the interest deduction rule. The Ministerial Decision No. 126 of 2023 details what constitutes interest for this purpose.
Given the complexities involved, it may be wise to seek professional guidance.
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