Interest Deduction Limits & Exempt Income Under UAE Corporate Tax

Under UAE Corporate Tax, a business can deduct net interest expenditure up to the higher of 30% of its tax-adjusted EBITDA or AED 12 million per tax period (Article 30, Federal Decree-Law No. 47 of 2022). Separately, certain income — mainly qualifying dividends and gains — is exempt and excluded from taxable income altogether.

Why does the UAE limit interest deductions at all?

Interest on business borrowing is normally a deductible expense, which lowers taxable profit. Left unchecked, a group could load a UAE company with debt — often from a related party abroad — purely to strip out profit and pay less tax. The General Interest Deduction Limitation Rule exists to stop that.

The rule sits in Article 30 of Federal Decree-Law No. 47 of 2022 and is fleshed out by Ministerial Decision No. 126 of 2023. It mirrors the international standard set out in the OECD's base erosion work, so the design will feel familiar to anyone who has dealt with similar caps in the UK or EU. The aim is straightforward: keep interest deductions proportionate to the real earnings of the business.

For the great majority of UAE companies, though, the headline is reassuring — the cap is built so that ordinary trading businesses with normal levels of borrowing are simply not caught. Understanding where the line sits is the difference between worrying about a rule that never applies to you and correctly flagging one that does when you file your Corporate Tax return.

How much interest can your business actually deduct?

The starting point is net interest expenditure — your total interest expense for the period minus your interest income. The rule then says you can deduct the higher of two figures:

Read that table carefully, because it corrects the single most common misunderstanding. The cap is not "you only ever get 30% of your interest". It is the greater of 30% of EBITDA or AED 12 million — and if your net interest is AED 12 million or below to begin with, none of it applies. EBITDA here is the greater of zero or your taxable income with interest, depreciation and amortisation added back.

If your net interest expenditure is AED 12 million or less, the interest deduction limit is not something you need to worry about at all.

What does the limit look like in practice?

Two businesses make the mechanics clear — one well below the threshold, one above it.

Bright Interiors LLC is a Dubai fit-out company with EBITDA of AED 2 million and net interest expenditure of AED 600,000 for the year. Because its net interest is far below AED 12 million, the limitation rule does not apply. Bright Interiors deducts the full AED 600,000. This is the position the overwhelming majority of SMEs are in.

Gulf Logistics DMCC is a larger group with tax-adjusted EBITDA of AED 30 million and net interest expenditure of AED 14 million. Here the rule bites because net interest exceeds AED 12 million. The deductible amount is the higher of 30% of EBITDA (30% × AED 30m = AED 9 million) or AED 12 million. The higher figure is AED 12 million, so Gulf Logistics deducts AED 12 million and carries the remaining AED 2 million forward, available for up to the next ten tax periods.

What counts as “interest” for this rule?

One trap worth knowing: the definition of interest in Ministerial Decision 126 of 2023 is broader than the figure your accountant might label "interest" under IFRS. It captures the interest component in a range of financing arrangements, not just a plain bank loan.

That includes profit elements in Islamic financing instruments, the finance charge inside finance leases, amounts on debt instruments, and guarantee or arrangement fees connected to raising finance. If you have complex funding, the net interest figure that feeds the cap may be larger than your statutory accounts suggest, which is one more reason the numbers behind a Corporate Tax computation should come from properly prepared books.

What about loans from people connected to the business?

There is a second, narrower control alongside the general rule. Interest on a loan obtained directly or indirectly from a related party can be restricted where the loan is used for certain purposes — for example, to fund a dividend, a capital contribution, or the acquisition of shares in a related party — unless the arrangement can be shown to have a genuine commercial rationale.

In practice this means related-party financing deserves a second look before filing. Where loan terms, pricing and purpose are documented in line with the arm's length principle, the deduction is usually defensible. Where they are not, the interest can be denied regardless of the 30% headroom. Businesses with significant intra-group debt should pair this with their transfer pricing review rather than treating the two as separate exercises.

Does the limit apply if you elect Small Business Relief?

Small Business Relief, under Article 21 and Ministerial Decision No. 73 of 2023, lets a resident business with revenue of AED 3 million or less in the tax period elect to be treated as having no taxable income. It is available for tax periods ending on or before 31 December 2026, and is not open to Qualifying Free Zone Persons or large multinational groups.

Because a relief period produces no taxable income, you do not compute or deduct net interest expenditure for it, and — importantly — you cannot carry forward any net interest disallowed in a period where you elected the relief. Net interest disallowed in a period where you did not elect relief can still be carried forward to a future non-relief period.

This trade-off is exactly the kind of judgement a Corporate Tax filing review is meant to surface. The relief saves tax now; the deductions it suspends might have saved more later.

Which income is left out of Corporate Tax altogether?

Deductions reduce taxable income; exemptions remove income from the calculation before you start. Knowing which receipts are exempt is just as valuable as knowing which costs are deductible, because exempt income is excluded when you work out taxable income.

The cleanest case is a domestic dividend. If a UAE company receives a dividend from another UAE company, it is exempt outright — the profits were already within the UAE tax net, so the law avoids taxing them twice. Foreign dividends and capital gains are where the conditions come in.

What are the conditions for the participation exemption?

The participation exemption in Article 23 is what allows a UAE company to receive foreign dividends, and gains on selling foreign shares, free of Corporate Tax. It applies only where the shareholding is a genuine, lasting investment rather than a short-term holding. The main conditions, set out with Ministerial Decision No. 116 of 2023, are:

Consider Marina Holdings LLC, a UAE company. It receives an AED 500,000 dividend from a UAE subsidiary — exempt under Article 22 with nothing further to prove. It also receives an AED 800,000 dividend from a German subsidiary it has owned at 10% for 18 months, where German tax exceeds 9%. That foreign dividend meets the Article 23 conditions, so it too is exempt. Had Marina held the German stake for only eight months when the dividend arose, the holding-period condition would fail and the AED 800,000 would be taxable.

How do interest limits and exempt income meet on the return?

On the Corporate Tax return, these rules sit at different points in the same calculation. You start from accounting profit, then strip out exempt income (dividends, qualifying gains), add back non-deductible items, and apply the interest cap to the net interest figure. Only after those adjustments do you arrive at taxable income, to which the 0% band up to AED 375,000 and 9% above it apply.

Two practical points follow. First, the EBITDA used for the interest cap is calculated excluding exempt income, so the two rules are linked — a business with a lot of exempt dividend income has a lower EBITDA base for the interest test. Second, because the figures must reconcile, the quality of your underlying records drives the quality of the result. Accurate accounting and bookkeeping is what lets a preparer separate exempt income, classify interest correctly, and support the position if the FTA asks.

If you are still confirming whether you even need to be in the system, our guide to Corporate Tax registration covers who must register and by when. And when it is time to file, a careful Corporate Tax return brings the interest, exemption and computation steps together in one place.