Maximize Your Tax Savings: Simplifying UAE Interest Deduction and Exempt Income Rules!

24 May, 2024
Business in UAE
Understanding Interest Deduction Limitations and Exempt Income for Small Businesses in the UAE
Navigating the tax landscape in the UAE can be challenging, especially for small businesses. One key aspect to understand is the rules around interest deduction limitations and exempt income. Let's break it down with simple explanations and practical examples.

General Interest Deduction Limitation Rules
Key Point: Businesses can only deduct up to 30% of their Net Interest Expenditure from their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

If a business's Net Interest Expenditure exceeds 30% of its EBITDA, the excess amount cannot be deducted in the current tax period. Instead, this excess can be carried forward for up to ten tax periods. However, if the Net Interest Expenditure is below AED 12,000,000, these limitations do not apply.
Example:
"Tech Solutions LLC" has an EBITDA of AED 10,000,000 and a Net Interest Expenditure of AED 4,000,000 for the tax period. According to the rule:

  • 30% of EBITDA = AED 3,000,000.
  • Therefore, Tech Solutions can deduct AED 3,000,000, and the remaining AED 1,000,000 (exceeding 30%) can be carried forward for up to ten tax periods.

Small Business Relief Impact on Interest Deduction
Key Point: Businesses opting for Small Business Relief are not subject to interest deduction limitations.

When a business elects for Small Business Relief, the limitations on interest deductions do not apply for that tax period. However, they cannot accrue or use Net Interest Expenditure in that period. Any Net Interest Expenditure from previous periods can be carried forward but will be subject to the ten-year carry-forward limit.

Example:
"Startup Innovators" elects for Small Business Relief and has Net Interest Expenditure carried forward from a previous period. During the relief period, they cannot use or accrue new Net Interest Expenditure. However, once they stop electing for the relief, they can utilize the carried-forward amount, keeping in mind the ten-year limit from when the expenditure was initially disallowed.

Exempt Income Key Point:Certain types of income are not taxable and must be excluded when calculating Taxable Income.

Exempt Income includes:
  • Dividends and profit distributions from UAE-based juridical persons. Income and gains from participating interests in UAE juridical persons.
  • Dividends and profit distributions from participating interests in foreign juridical persons.
  • Income from a foreign permanent establishment, provided certain conditions are met.


Example: "Global Investments LLC," a UAE-based company, receives AED 500,000 in dividends from another UAE-resident company and AED 300,000 from a foreign company in which it has a participating interest. Both these amounts are considered exempt income and should not be included in Global Investments' taxable income calculation.

Understanding these rules helps businesses in the UAE navigate their tax obligations more effectively. By knowing how to handle interest deduction limitations and recognizing exempt income, small businesses can make informed decisions and potentially reduce their tax burden.
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