Interest deduction limits and exempt income under UAE corporate tax

Under UAE corporate tax, a business can deduct net interest deduction expenditure up to the higher of 30% of its tax-adjusted EBITDA or AED 12 million per tax period, under Article 30 of Federal Decree-Law No. 47 of 2022. Separately, certain income is exempt and never enters the calculation at all. Both rules meet on the same corporate tax return, and both reward getting the numbers right before you file rather than after.

Why does the UAE limit interest deductions at all?

To stop profit being stripped out through debt. Interest on business borrowing is normally deductible, which lowers taxable profit. Left unchecked, a group could load a UAE company with debt — often borrowed from a related party abroad — purely to move profit out of the UAE tax net.

The General Interest Deduction Limitation Rule sits in Article 30 of the Corporate Tax Law and is fleshed out by Ministerial Decision No. 126 of 2023, with the FTA’s own Interest Deduction Limitation Rules guide adding the worked detail. The design follows the international standard from the OECD’s base-erosion work, so it will feel familiar to anyone who has dealt with similar caps in the UK or the EU.

For most UAE companies the headline is reassuring: the rule is built so that ordinary trading businesses with normal levels of borrowing are simply not caught. Knowing where the line sits is the difference between worrying about a rule that will never apply to you and correctly flagging one that does.

How much interest can your business actually deduct?

The higher of 30% of tax-adjusted EBITDA or AED 12,000,000, applied to net interest expenditure — total interest expense for the period minus interest income. Because the test takes the higher of the two, the AED 12 million figure works as a floor, not a ceiling.

Read that table carefully, because it corrects the most common misunderstanding of the rule. It is not “you only ever get 30% of your interest.” It is the greater of 30% of EBITDA or AED 12 million — and if net interest is AED 12 million or below to begin with, none of it applies. EBITDA for this purpose is the greater of zero or taxable income with interest, depreciation and amortisation added back, calculated excluding exempt income.

What does the interest deduction cap look like in practice?

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

Bright Interiors LLC is a Dubai fit-out company with tax-adjusted EBITDA of AED 2,000,000 and net interest expenditure of AED 600,000. Net interest is far below AED 12 million, so the limitation rule does not apply and the full AED 600,000 is deducted — the position the overwhelming majority of UAE SMEs are in.

Gulf Logistics DMCC has tax-adjusted EBITDA of AED 30,000,000 and net interest expenditure of AED 14,000,000. Here the rule bites. The deductible amount is the higher of 30% of EBITDA (AED 9,000,000) or AED 12,000,000 — so AED 12,000,000 is deducted and AED 2,000,000 is carried forward.

Notice what drives the Gulf Logistics answer: the AED 12 million floor, not the 30% calculation. A business with weak earnings and heavy debt is protected by the floor; a business with strong earnings and very heavy debt is the one the 30% test is aimed at.

What counts as “interest” for the deduction limit?

More than your accounts call interest. The definition in Ministerial Decision No. 126 of 2023 captures the interest component of financial returns regardless of how the applicable accounting standard classifies it, so the figure feeding the cap can be larger than the “finance costs” line in your statutory accounts.

If your funding is at all complex, that reclassification work belongs in the computation rather than the audit file, and it starts from properly prepared books. Clean accounting and bookkeeping is what lets a preparer separate the interest component from the rest.

Who is outside the interest deduction limitation rule?

Several categories sit outside it completely, which is worth checking before you run any EBITDA calculation at all. The exclusions come from Article 30 of the Corporate Tax Law and Ministerial Decision No. 126 of 2023.

The grandfathering point is the one that gets missed in practice. A facility signed in, say, October 2022 and still running today can be carved out of the calculation — but only if you can produce the terms agreed before 9 December 2022, and only to the extent of the interest attributable to it. That is a documentation exercise, and the FTA expects the supporting records to exist.

What about loans from related parties?

A second, narrower control sits alongside the general rule. Interest on a loan obtained directly or indirectly from a related party can be denied where the loan funds certain transactions — a dividend or profit distribution, a capital contribution, a redemption or capital reduction, or the acquisition of an ownership interest in a person who is or becomes a related party — unless the arrangement has a genuine commercial rationale.

This restriction bites independently of the 30% headroom. A company can be comfortably inside the general cap and still have related-party interest disallowed, because the test is about the purpose of the borrowing rather than the size of it. One statutory safe harbour helps: where the related-party lender is subject to corporate tax, or a tax of at least 9% on the interest, the main purpose test is generally treated as satisfied.

In practice this means intra-group 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 headroom. Pair this review with your transfer pricing documentation rather than treating them as separate exercises.

How long can disallowed interest be carried forward?

Up to ten tax periods, in the order in which it arose. Net interest expenditure that the cap disallows is not lost — it is banked and deducted in a later period where there is headroom, taking the oldest amount first. That makes the carry-forward balance a genuine asset worth tracking on a schedule rather than recalculating each year.

Three points decide whether it survives to be used. A disallowed amount arising in a period for which you elect Small Business Relief cannot be carried forward at all. Tax-group changes matter too: when a subsidiary leaves a tax group, or a group ceases, MD 126/2023 sets out how the carried-forward balance is allocated. And the ten-period clock runs from the period in which the interest was disallowed, not from when you first try to use it.

Keeping that schedule current is unglamorous and valuable. A business that crosses the AED 12 million line in one year and falls back below it the next can deduct the earlier disallowed amount in the later year — but only if someone recorded it.

Does the interest deduction limit apply if you elect Small Business Relief?

Not in the way you might expect — electing switches the whole computation off. Small Business Relief, under Article 21 and Ministerial Decision No. 73 of 2023, lets a resident business with revenue of AED 3,000,000 or less elect to be treated as having no taxable income. Ministerial Decision No. 131 of 2026, issued on 29 July 2026, extended it to tax periods ending on or before 31 December 2029. Qualifying Free Zone Persons and members of large multinational groups cannot elect.

Because a relief period produces no taxable income, you do not compute or deduct net interest expenditure for it — and any net interest disallowed in that period cannot be carried forward. Amounts disallowed in a period where you did not elect remain available and can be used in a future non-relief period. The same asymmetry applies to tax losses.

The correction worth making, because it is widely stated the other way round: the election is made in each period’s return and never rolls over, but skipping a year does not bar you from electing in a later year. Each period is assessed on its own. What ends eligibility permanently is revenue above AED 3 million in any period. What you cannot do is add the election to a return already filed — there is no retrospective election, so a missed year is a missed year. How the AED 3 million figure itself is built is covered in our guide to what counts as revenue for Small Business Relief.

Which income is left out of UAE corporate tax altogether?

Deductions reduce taxable income; exemptions remove income from the calculation before you start. Four categories matter for most businesses, and each has its own article in the Corporate Tax Law.

The cleanest case is the domestic dividend. A UAE company receiving a dividend from another UAE company has it exempt outright — the profits were already inside the UAE tax net, so the law does not tax them twice. Foreign dividends and capital gains are where the conditions come in, and where the rules changed most recently.

What are the participation exemption conditions in 2026?

They now come from Ministerial Decision No. 302 of 2024, which replaced Ministerial Decision No. 116 of 2023 for tax periods commencing on or after 1 January 2025. MD 116 still governs earlier periods, so the version that applies depends on the period you are filing — a FY2025 return, due 30 September 2026, falls under MD 302.

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 where the shareholding is a genuine, lasting investment rather than a short-term holding.

Take Marina Holdings LLC, a UAE company. It receives an AED 500,000 dividend from a UAE subsidiary — exempt under Article 22, nothing to prove. It also receives an AED 800,000 dividend from a German subsidiary held at 10% for 18 months, where German tax exceeds 9%: the Article 23 conditions are met, so that is exempt too. Had the German stake been held for only eight months when the dividend arose, the holding-period condition would fail and the full AED 800,000 would be taxable — AED 72,000 of tax at 9%, on timing alone.

Now the MD 302 change in action. A UAE company holds 2% of a foreign company, acquired for AED 20,000,000. Under MD 116 the 2% holding met the ownership test through the acquisition-cost route but still had to clear the profit-entitlement and asset tests separately. Under MD 302, the AED 4 million threshold carries all three, so the company needs only the holding-period and subject-to-tax conditions. Given how much turns on which decision applies, the position for a specific holding is worth confirming with your adviser against the period being filed.

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

They sit at different points in the same computation, and the order matters. You start from accounting profit, strip out exempt income, add back non-deductible items, apply the interest cap to the net interest figure, then deduct any brought-forward amounts. Only after all of that do you reach taxable income, to which the 0% band up to AED 375,000 and 9% above it apply.

Two consequences follow. First, EBITDA for the interest cap is calculated excluding exempt income, so the two rules are linked: a business with substantial exempt dividend income has a smaller EBITDA base for the interest test, and can find the cap biting even though its accounting earnings look healthy. Second, because every figure has to reconcile back to the financial statements, the quality of the records drives the quality of the result.

If you are still confirming whether you need to be in the system at all, our guide to corporate tax registration covers who registers and by when, and the wider framework is set out in the UAE corporate tax guide.

What penalties apply if you get the computation wrong?

The corporate tax penalties in Cabinet Decision No. 75 of 2023, as amended by Cabinet Decision No. 10 of 2024, apply to the return as a whole — including a computation that overstates a deduction or wrongly treats income as exempt. They accrue whether or not the error was deliberate.

The practical risk in this area is not a missed deadline but an unsupported position: a participation treated as exempt without the holding-period evidence, or a pre-9 December 2022 carve-out claimed without the original loan terms. Both are cheap to document at the time and expensive to reconstruct two years later under an FTA query.