General Interest Deduction Limitation Rule in the UAE Corporate Tax

General Interest Deduction Limitation Rule in the UAE Corporate Tax: All You Need To Know 

The UAE Ministry Of Finance issued Ministerial Decision No. 126 of 2023 on 30 May 2023, in relation to the General Interest Deduction Limitation Rule (GIDLR) for the purpose of corporate taxation under the Federal Decree Law No. 47 of 2022. 

This General Interest Deduction Limitation Rule (GIDLR) defines the treatment of interest expense or income of taxable persons under corporate tax law. This decision is introduced to set a maximum limit in the Net Interest Expenditure (NIE) that is allowed to be deducted from the accounting income of a taxable person. 

Key Takeaways

• The General Interest Deduction Limitation Rule defines the maximum amount of interest that can be deducted by businesses providing due relief to certain businesses.

• This rule is introduced to align with international standards, where the Net Interest Expenditure deductible is limited to greater of either EBITDA ( Earnings Before Interest, Tax, Depreciation, and Amortization) or a fixed threshold of AED 12 Million. For Tax Groups having banks and/or insurance providers as members, 30% EBITDA will be calculated by excluding income and expenses of those members. 
• The businesses are required to maintain adequate documentation related to the Net Interest Expenditure that is attributable to debt instruments or liabilities for which the terms agreed prior to 9 December 2022. 

Ministerial Decision No. 126 of 2023 in relation to General Interest Deduction Rule in the UAE under the Corporate Tax Law

As per GIDLR, the  interest expenditure or interest income is defined as the interest component in financial returns on Financial Assets and Liabilities, irrespective of their treatment under the applicable accounting standards. The rule applies to interest components on specific arrangements/instruments that is categorized under the following:

• Performing and Non-performing Debt Instruments
• Collateralized Asset-backed Debt Securities
• Lease or Hire Purchase Arrangements
• Agreements for the Sale and Subsequent Repurchase of the Same Security at a Future Date at an Agreed-upon Price
• Stock Lending Arrangements
• Securitizations and Similar Transactions
• Collective Investment Schemes
• Factoring and Similar Accounts Receivable Purchase Transactions

What is defined as Interest as per General Interest Deduction Limitation Rule (GIDLR)?

• Finance-related Expenses
• Financial Components of Lease Payments
• Interest on Islamic Financial Instruments
• Capitalized Interest
• Forex Gains / Losses on Interest
• Interest on Financial Derivative Instruments

What is the Net Interest Expenditure (NIE)?

Net Interest Income is the interest expense excluding the interest earned during the tax period, which also includes net interest that was carried forward from the previous tax periods. 

What is considered the Interest Expenditure or Income, for the purpose of the General Interest Deduction Limitation Rule (GIDLR)?

The following are the General Interest Deduction Limitation Rule:

• Returns on a financial asset or a liabilities including interest or other payments, in the nature of interest, in spite of the classification thereby.
• All expenditures associated with raising finance (such as arrangement fees, guarantee fees, commitment fees or other fees of similar nature). 
• Interest component on any instruments that dodge risks directly connected with raising the finance. 
• Interest equivalent component on Islamic Financial Instruments. 
• Interest element of a finance or a non-finance lease accounted for in accordance with the Accounting Standards. 
• All foreign exchange gains and losses accruing from Interest. 
• Income or expenditure attributable to any capitalised interest amount, in accordance with the Accounting Standards.

How does the General Interest Deduction Limitation Rule apply? 

As per Article 30 of the Federal Decree-Law No.47 of 2022 on corporate taxation, up to 30% of accounting Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) will be deductible in the Net Interest Expenditure, 

EBITDA is mainly the taxable income adjusted for the following items:

• NIE for the relevant tax period (excluding any in relation to qualifying infrastructure projects).
• Depreciation and amortisation expenditure that is calculated for determining the taxable income for the relevant tax period.
• Any interest expense or income in connection to the historical financial assets or liabilities held prior to 9 December 2022.

So as per the General Interest Deduction Limitation Rule (GIDLR), the deductible expenses will be calculated as follows:

1. If the annualised NIE for the relevant tax period is less than or equal to AED 12 Million, the deductible expense will be 100% of the NIE.
2. If the annualised NIE for the relevant tax period exceeds AED 12 Million, the deductible expense will be higher or AED 12 Million or 30% of accounting EBITDA

What are the exemptions or exclusions under the General Interest Deduction Limitation Rule (GIDLR)?

Interest income and Interest expenditure in relation to Qualifying Infrastructure Projects exempted under Article (14) of this Decision shall be excluded.

Net Interest Expenditure in relation to Historical Financial Liabilities shall not be subject to the General Interest Deduction Limitation Rule. which includes:

•  Agreements for debt instruments or other liabilities for which terms were agreed prior to 9 December 2022, in order to mitigate the interest rate risk on those liabilities. 

The Net Interest Expenditure attributable to debt instruments or other liabilities being lower of the following:

• Net Interest Expenditure that arises on the debt instrument or other liability in the Tax Period; or

• Net Interest Expenditure that would have arisen on the debt instrument or other liability in the Tax Period in accordance with the terms of the debt instrument or other liability as they stood on 9 December 2022.

Net Interest Expenditure incurred by the Qualifying Infrastructure Project Person who is a resident, involved in the Qualifying Infrastructure Project will be exempted under the General Interest Deduction Limitation Rule given that the Qualifying Infrastructure Project Person and the Qualifying Infrastructure Project meets the criteria mentioned in the decision.

How does the Interest Deduction Limitation Rule apply for Tax Groups?

Pre-grouping unutilised NIE of a Subsidiary can only be used to offset the taxable income attributable to the specific subsidiary.

Any unutilised NIE of a subsidiary, other than the pre-grouping NIE, will remain with the tax group if the subsidiary exits the tax group.

Upon The Cessation of A Tax Group:

-If the parent company remains a taxable person, the tax group’s carry forward NIE will stay within the parent company.

-If the parent company ceases to be a taxable person, the tax group’s carry-forward NIE cannot be used to offset the future taxable income of subsidiaries, except for pre-grouping unutilized NIE.

How KGRN Can Assist?

To navigate the General Interest Deduction Limitation Rule, our experts at KGRN can assist businesses by analyzing their financing structure to assess the tax impact, and identifying opportunities for deductions and credits. Moreover, we provide strategic guidance on navigating tax regulations to maximize benefits while minimizing tax liabilities. Please reach out to our team today, let us make your compliance journey seamless and hassle-free!

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