Corporate Tax

Interest Deduction Limitation in UAE Corporate Tax

2026-02-14 · 4 min read · By Aureus Worldwide

Interest is a normal cost of doing business, but tax systems worldwide limit how much of it can be deducted, to stop profits being stripped out through excessive borrowing, often between related parties. The UAE corporate tax regime follows this approach with a general interest deduction limitation in Federal Decree-Law No. 47. For most smaller businesses it changes nothing, thanks to a generous safe harbour. For larger or highly leveraged groups, it can materially affect taxable income. This guide explains how the rule works and who needs to plan for it.

Why the rule exists

Without a limit, a group could load a UAE company with debt, particularly from related parties in lower-tax locations, and deduct large interest payments to reduce taxable profit. The interest deduction limitation, aligned with international (BEPS) practice, caps how much net interest expense a business can deduct in a period. The aim is to allow genuine financing costs while preventing artificial profit-shifting through interest.

The core test: 30% of EBITDA or AED 12 million

The general rule allows net interest expense to be deducted up to the greater of:

• 30% of tax-adjusted EBITDA (earnings before interest, tax, depreciation and amortisation), or
• a safe-harbour amount of AED 12 million

Because the limit is the higher of the two, a business whose net interest is at or below AED 12 million is generally unaffected by the restriction, which removes the large majority of UAE SMEs from its scope entirely.

The figures are illustrative. Confirm the current percentage, safe-harbour amount and EBITDA definition with the FTA, as these can change.

Net interest, not gross

The cap applies to net interest expense, interest expense reduced by taxable interest income. So a business earning interest as well as paying it measures only the excess. Getting this calculation right depends on correctly identifying what counts as interest for the rule, which can include amounts economically equivalent to interest, not just bank loan charges.

Understanding tax-adjusted EBITDA

EBITDA here is a tax-adjusted figure, not simply the EBITDA from your management accounts. You start from taxable income and add back net interest, depreciation and amortisation, with further adjustments for exempt income and similar items. Because exempt income is excluded, the tax EBITDA can differ noticeably from accounting EBITDA. Our EBITDA guide explains the underlying concept; for the corporate tax version, the adjustments matter, so build the figure carefully from your financial statements.

What happens to disallowed interest

Interest restricted in a period is not lost permanently. Disallowed net interest can generally be carried forward and deducted in future periods, subject to the same cap applying again in those years. This means a temporary spike in interest, say, in a heavy investment year, may still be relieved later when EBITDA recovers. Confirm the carry-forward period and any conditions with the FTA.

Exclusions and special cases

The general limitation does not apply uniformly to everyone. Certain businesses and arrangements sit outside or are treated differently, and there can be a separate specific interest limitation targeting related-party loans used for particular transactions, such as dividends or capital contributions, where the main purpose is a tax advantage. Banks, insurers and some other regulated entities may also be subject to different treatment. Because these carve-outs are detailed, confirm how your specific situation is treated rather than assuming the general rule applies.

Who actually needs to worry about this

For practical purposes:

• Smaller businesses with net interest at or below AED 12 million: generally unaffected
• Larger companies and groups with significant borrowing: need to compute the cap each period
• Highly leveraged or related-party-financed structures: the most exposed, and the main target

If you fall into the second or third group, model the limitation into your tax planning before taking on new debt.

Common pitfalls

• Using accounting EBITDA instead of the tax-adjusted figure
• Measuring gross rather than net interest
• Forgetting the AED 12 million safe harbour applies as the higher alternative
• Overlooking the carry-forward of disallowed interest
• Missing a specific related-party interest restriction
• Not planning the cap into financing decisions

How Aureus Worldwide helps

Aureus Worldwide computes the interest deduction limitation for UAE businesses, building tax-adjusted EBITDA, identifying net interest correctly, applying the 30% / AED 12 million cap, and tracking carried-forward disallowed interest. Our tax team models the rule into financing and group structures, while our accounting team keeps the underlying numbers clean. We flag where you should confirm changeable specifics with the FTA. To understand your interest position, contact us.

Talk to our chartered accountants →