The Federal Tax Authority has issued Public Clarification CTP012, addressing a question worth hundreds of millions of dirhams annually to the UAE banking sector — and one every corporate tax consultant working with financial institutions should now have an answer ready for: are the coupon payments banks make on Additional Tier 1 (AT1) capital instruments deductible in computing Taxable Income? The answer is a firm no — wherever those payments do not pass through the profit and loss account. Because Basel III-compliant AT1 instruments are, almost by design, classified as equity under IFRS, their coupons are recognised directly in retained earnings, never enter Accounting Income, and therefore attract no Corporate Tax deduction. The UAE has, with this clarification, confirmed itself as an “accounting-follows” jurisdiction on hybrid capital — with real consequences for the after-tax cost of bank capital stacks.
Effectiveness: As a Public Clarification, CTP012 states the FTA’s position on existing law and is effective from the implementation of the Corporate Tax Law itself — it applies to Tax Periods already closed and returns already filed. Banks that claimed AT1 coupon deductions in prior returns should assess their position now.
A primer: the Basel capital framework, and where AT1 sits
To see why the tax answer lands where it does, it helps to start with the regulation that creates these instruments in the first place.
Why regulatory capital exists. Banks are uniquely leveraged businesses: they fund long-dated, risky assets largely with depositors’ money. Regulatory capital is the buffer of the bank’s own loss-absorbing resources that must stand in front of depositors — so that when loans go bad, shareholders and capital investors absorb the loss, not depositors or the taxpayer. The Basel framework, developed by the Basel Committee on Banking Supervision and overhauled as Basel III after the 2008 global financial crisis, sets the international standard for how much of this capital banks must hold and what quality it must be. The CBUAE implements a Basel III-aligned regime for UAE banks, and CTP012 extends to foreign frameworks that are substantially aligned.
The three-layer capital stack. Basel III ranks capital by its ability to absorb losses:
| Layer | What it is and when it absorbs losses | Minimum (of RWA) |
|---|---|---|
| Common Equity Tier 1 (CET1) | Ordinary shares and retained earnings — highest quality; absorbs losses first and continuously | 4.5% |
| Additional Tier 1 (AT1) | With CET1 forms “going-concern” Tier 1 capital — absorbs losses while the bank keeps operating; Tier 1 minimum 6% less CET1’s 4.5% creates the 1.5% bucket AT1 instruments fill | Tier 1: 6.0% |
| Tier 2 | “Gone-concern” capital — typically dated subordinated debt absorbing losses in liquidation or resolution | Total: 8.0% |
What the percentages are measured against. All of these ratios are expressed as a percentage of risk-weighted assets (RWA) — not the bank’s balance sheet total. Each asset is weighted by its regulatory riskiness before the capital requirement is applied: cash and high-grade sovereign exposures carry a weight at or near 0%, residential mortgages a moderate weight, and unsecured corporate lending 100% or more, with operational and market risk adding further RWA on top. A bank with AED 100 billion of assets might therefore have, say, AED 60 billion of RWA — and its 6% Tier 1 requirement would be AED 3.6 billion, of which up to AED 900 million (1.5% of RWA) can be met with AT1 instruments. Risk-weighting is the reason capital requirements scale with the risk a bank runs, not merely its size — and it is the denominator against which every figure in this framework, including the AT1 bucket, is computed.
On top of the minimums sit the capital conservation buffer (2.5%) and, for the UAE’s designated systemically important banks, D-SIB surcharges — lifting real-world requirements well above the headline 8%.
Why AT1 instruments look the way they do. For an instrument to count in the 1.5% AT1 bucket, the regulator must be confident it will behave like equity in a crisis. Hence the qualifying features CTP012 lists: the instrument must be perpetual (no maturity, no step-ups or incentives to redeem, so it can never “fall due” at a bad moment); callable only with regulatory approval; subordinated below depositors, general creditors, and the bank’s debt; carry coupons the issuer can cancel at its full discretion, at any time, without default; and pay those coupons only out of distributable items — broadly, retained earnings and distributable reserves per the latest audited or reviewed consolidated financial statements. Market-standard AT1 also embeds a loss-absorption mechanism — write-down or conversion into equity if the bank’s CET1 ratio falls through a trigger — which is why these instruments are colloquially called contingent convertibles, or “CoCos.”
Why banks issue AT1 rather than just more shares. AT1 is the cheapest way to satisfy the Tier 1 requirement beyond CET1: it avoids diluting ordinary shareholders, its coupon is typically well below the cost of equity, and it is placed with institutional investors who price the subordination and cancellation risk. That economic logic — equity-like risk, debt-like coupon — is exactly what makes its tax treatment contentious worldwide. Which brings us to the accounting, and then the tax.
The instrument under IFRS: why AT1 is equity almost by design
The regulatory features described above determine the IFRS answer. Under IAS 32, an instrument is a financial liability only if the issuer has a contractual obligation to deliver cash. A perpetual instrument whose coupons are fully discretionary carries no such obligation — so the standard AT1 template lands in equity, and its coupons are treated like dividends: a movement in the statement of changes in equity, debited to retained earnings, never touching profit or loss. The regulatory features that make the instrument loss-absorbing are precisely the features that keep its cost out of the income statement.
CTP012 is careful with its terms: “payments” means the dividends/coupons on the instrument, not repayments of principal, and the clarification takes no position on accounting classification itself or on whether any given instrument satisfies the regulatory AT1 conditions.
The FTA’s reasoning: three short steps
The analysis is compact. Article 20(1) requires Taxable Income to be determined from standalone IFRS financial statements; Article 20(2) makes Accounting Income — the accounting net profit or loss — the starting point, adjusted only for the listed items; and, decisively, a deduction is not allowable for payments that were never included in Accounting Income in the first place. There is no adjustment line that inserts an expense the accounts never recognised. An equity-classified AT1 coupon paid through retained earnings is invisible to the tax computation — and stays invisible.
The FTA’s own example makes the point: Bank X issues a CBUAE-recognised AT1 instrument classified as equity, declares a 3% coupon in 2025 paid through retained earnings, and gets no deduction for its 2025 Tax Period.
The logic cuts the other way too, and this is worth stating even though CTP012 does not: in the rarer case where an instrument’s terms create a contractual payment obligation and it is classified (wholly or partly) as a liability under IFRS, its coupons run through profit or loss as finance cost, reduce Accounting Income, and are deductible on ordinary principles — and banks enjoy a structural advantage here, because the general interest deduction limitation rule does not apply to banks and insurance providers. The tax borderline is therefore not “AT1 versus Tier 2”; it is equity-classified versus liability-classified, an accounting determination made instrument by instrument under IAS 32.
Worked example — the cost of capital consequence
Facts. Gulf Commercial Bank PJSC has AED 1 billion of equity-classified AT1 outstanding at a 6% coupon (AED 60 million per year, paid through retained earnings) and Accounting Income of AED 500 million for its 2026 Tax Period. The table compares the position against an identical amount raised as liability-classified Tier 2 (9% rate applied throughout for simplicity):
| AT1 (equity-classified) | Tier 2 (liability-classified) | |
|---|---|---|
| Coupon (AED 1bn @ 6%) | AED 60m via retained earnings | AED 60m via profit or loss |
| Accounting Income | AED 500m | AED 440m |
| Corporate Tax @ 9% | AED 45.0m | AED 39.6m |
| Annual tax difference | — | AED 5.4m saving |
| After-tax coupon cost | 6.00% | 5.46% |
Post-CTP012, every capital planning model comparing AT1 against Tier 2 or senior issuance should carry a 9% wedge on the coupon — and treasury teams pricing new AT1 should recognise that the UAE, unlike several jurisdictions that legislated special deductions for regulatory hybrid coupons, offers none.
Observations and open questions
Retrospective reach and filed returns. Because a Public Clarification interprets rather than amends the law, CTP012’s position applies from the start of the Corporate Tax regime. Banks that deducted equity-classified AT1 coupons in their first CT returns — whether by book-to-tax adjustment or provision-level assumption — are carrying an error on the FTA’s stated view, one that should be flagged in any future corporate tax filing in UAE for the institution. The choice between voluntary disclosure and holding a contrary position should be made deliberately, with the penalty-mitigation benefits of early disclosure in mind.
The holder side is expressly open. CTP012 disclaims any view on holders. For a UAE corporate holder, the characterisation question is live: if AT1 coupons received are dividends or other profit distributions from a resident juridical person, they are exempt under Article 22; if they are interest, they are taxable. Symmetry would suggest that a payment which is a non-deductible equity distribution for the issuer should be an exempt dividend for a resident holder — but the FTA has deliberately not said so, and holders (particularly banks holding other banks’ AT1) should treat the point as unresolved.
Pillar Two divergence. The GloBE Model Rules take the opposite approach: movements in equity attributable to Additional Tier One Capital are treated as income or expense in computing GloBE Income. A large UAE bank within the UAE DMTT therefore deducts its AT1 coupon for Pillar Two purposes while receiving no deduction for Corporate Tax purposes — two parallel computations, deliberately different on the same cash flow. Tax teams should ensure the DMTT workings do not inherit the CT treatment by copy-through.
Foreign bank branches. UAE branches of foreign banks whose head offices issue AT1 face an attribution question: whether any share of head-office AT1 cost can be recognised in the branch’s standalone financial statements at all. CTP012’s logic suggests that if it is not in the branch’s Accounting Income, it is not deductible — making the accounting attribution, once again, the whole game.
Instrument-level review, not portfolio-level assumption. Compound instruments, AT1 with unusual mandatory features, and legacy instruments issued under earlier regimes can carry liability components. The deduction analysis should be run per instrument against the IAS 32 classification memo — not assumed across the AT1 book.
What banks should do now
Banks and their tax teams should reconcile every regulatory capital instrument to its IFRS classification memo and map coupons to their accounting presentation; verify that filed CT returns did not deduct equity-classified AT1 coupons, and quantify exposure where they did — a review many institutions run jointly with their corporate tax consultants in Dubai; separate the CT and DMTT treatments of AT1 in the Pillar Two workings; embed the 9% coupon wedge into capital issuance pricing and internal capital-allocation models; and monitor for any future legislative response — jurisdictions that value AT1 issuance onshore have historically legislated deductibility, and the UAE’s banking hub ambitions make this a policy space worth watching.
How TSAC can help
TSAC, one of the tax advisory firms with a dedicated banking and financial institutions practice, advises banks and financial institutions on Corporate Tax computation, book-to-tax adjustment frameworks, voluntary disclosure strategy, and the interaction of CT with the UAE’s Pillar Two regime. If your institution has AT1 or other hybrid capital outstanding, the classification memos your finance team already holds are now tax documents — and they should be reviewed as such before the FTA does.