General Interest Deduction Limitation Rule in the UAE Corporate Tax: All You Need To Know
On May 30, 2023, the UAE Ministry of Finance released Ministerial Decision No. 126 of 2023 relating to the General Interest Deduction Limitation Rule (GIDLR) for business taxation under Federal Decree Law No. 47 of 2022.
This General Interest Deduction Limitation Rule (GIDLR) governs the treatment of taxable persons’ interest expense or income under corporate tax law. This judgment is intended to establish a maximum limit on the Net Interest Expenditure (NIE) that can be deducted from a taxable person’s accounting income.
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 in UAE, 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:
- 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.
- 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!
Frequently Asked Questions
1. What is the General Interest Deduction Limitation Rule under UAE Corporate Tax?
The General Interest Deduction Limitation Rule restricts the amount of net interest expenditure that businesses can deduct when calculating taxable income under the UAE Corporate Tax Law, subject to the applicable provisions and exceptions.
2. Why was the General Interest Deduction Limitation Rule introduced?
The rule aims to prevent excessive interest deductions that could reduce taxable profits and to align the UAE Corporate Tax framework with internationally recognized tax practices.
3. Who does the General Interest Deduction Limitation Rule apply to?
The rule generally applies to taxable persons subject to UAE Corporate Tax, although certain entities and situations may qualify for exclusions or exemptions under the law.
4. How is net interest expenditure calculated?
Net interest expenditure is generally calculated as the difference between interest expenses incurred and interest income earned during the relevant tax period, subject to the provisions of the Corporate Tax Law.
5. Are all interest expenses deductible under UAE Corporate Tax?
No. Interest deductions may be limited under the General Interest Deduction Limitation Rule, and certain interest expenses may be disallowed depending on the applicable provisions of the law.
6. Are there any exceptions to the interest deduction limitation rule?
Yes. The UAE Corporate Tax Law provides certain exclusions and exceptions for specific entities or circumstances. Businesses should review the applicable legislation or seek professional advice to determine eligibility.
7. How does the interest deduction limitation affect Corporate Tax calculations?
If the limitation applies, businesses may not be able to deduct the full amount of their interest expenses when calculating taxable income, which could increase their Corporate Tax liability.
8. What records should businesses maintain for interest deductions?
Businesses should maintain loan agreements, financing documents, interest schedules, accounting records, financial statements, and other supporting documentation to substantiate interest deductions.
9. Can disallowed interest be carried forward?
Subject to the provisions of the UAE Corporate Tax Law, certain disallowed net interest expenditure may be carried forward to future tax periods, provided the applicable conditions are met.
10. How can businesses ensure compliance with the General Interest Deduction Limitation Rule?
Businesses should maintain accurate financial records, review financing arrangements regularly, assess the impact of interest limitations, and seek professional Corporate Tax advice to ensure compliance.
11. Does the rule apply to both local and foreign borrowings?
The applicability depends on the nature of the financing arrangement and the relevant provisions of the UAE Corporate Tax Law. Businesses should evaluate each case based on the legislation.
12. Why should businesses seek professional advice on interest deduction rules?
The General Interest Deduction Limitation Rule can be complex. Professional guidance helps businesses correctly calculate deductible interest, comply with UAE Corporate Tax regulations, and optimize their tax position.
