May 31 2023

United Arab Emirates Clarifies Rules Regarding Deduction of Interest for Corporate Tax Purposes

Source: IBFD Tax Research Platform News

The Minister of Finance (MoF) has clarified the rules for limiting the general interest deduction for corporation tax (CIT) purposes. The ruling includes provisions on:

  • the definition of interest, which includes, but is not limited to, the interest component of any of the following:
    • performing and non-performing debt securities;
    • shares in collective investment schemes that invest primarily in cash and cash equivalents;
    • asset-backed securities and similar instruments;
    • agreements to sell and repurchase the same security at a future date and at an agreed price;
    • securities lending and similar agreements to transfer a security subject to an obligation or right to repurchase the same or a designated similar security;
    • securitization and similar transactions involving the transfer of assets in exchange for the issue of securities giving entitlement to the income generated by those assets;
    • lease or hire purchase arrangements where substantially all the risks and rewards of ownership of the underlying asset have been transferred to the lessee; and
    • factoring and similar receivables purchase transactions.

In addition, the rules require the interest component to include the following costs:

  • guarantee fees;
  • arrangement fees;
  • commitment fees; and
  • any other commissions similar in nature to guarantee, arrangement and commitment fees.

The amount of interest that may be deducted from taxable income is the greater of AED 12,000,000 or 30% of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA).

The amount of EBITDA will be the higher of AED 0 and the amount calculated as taxable income based on the sum of the following items:

  • net interest expense for the relevant tax period;
  • depreciation expense considered in determining taxable income for the relevant tax period; and
  • any interest income or expense relating to historic financial assets or liabilities held before 9 December 2022.

The ministerial decision is available here: Ministerial Decision no.126 of 2023