Since the launch of the UAE’s Corporate tax regime in 2023, businesses across industries have focused on ensuring their profits, expenses, and disclosures meet the new regulatory expectations. While most attention initially centered on tax rates and relief thresholds, a far more technical – and impactful – issue has now taken center stage: the deductibility of interest.
Under UAE Corporate Tax, not all interest is deductible. And not everything called “interest” on your books will be qualified. What matters now is substance over form, careful categorization, and knowing when limitations apply.
This article unpacks the Federal tax Authority’s Interest Deduction Limitation Rules Guide – offering a complete, practical, and strategic view of how different forms of interests are treated for tax purposes in the UAE
Why Interest Deduction Is Now a Critical Area
Everywhere in the world, interest has frequently been used to reduce taxable income by shifting profits through aggressive financing structures – typically with high levels of debt or related – party borrowing.
In response, the UAE’s tax framework introduced two key limitation mechanisms:
1. The Specific Interest Deduction Limitation Rule, which targets related-party abuse.
2 .The General Interest Deduction Limitation Rule, which caps interest based on adjusted EBITDA
But these rules come into play only after checking the most fundamental question: Is the payment actually “interest”?
Defining “Interest” in UAE Tax Law
The Law adopts an economic substance approach, i.e. interest not only includes the tradition interest that in paid on bank loans, but also:
- Return on Islamic finance structures (e.g. Murabaha, Ijara, Sukuk)
- Discounts and premiums on bonds
- Fees like arrangement, guarantee, commitment, and underwriting
- Charges in finance leases and installment sales
- Embedded interest in stock lending, repos, factoring, and securitization
- FX fluctuations relating to interest
- Deferred charges tied to the use of credit
The Four Legal Filters for deducting Interest
General Deductibility Rules
Must be wholly and exclusively for business purposes; Capitalized interest is not immediately deductible (must be amortized).
Arm’s Length Standard
For loans from Related Parties or Connected Persons, interest must be consistent with market terms; Excess above fair market value is disallowed
Specific interest Deduction Limitation Rule
Disallows interest where Related Party loans are sued to pay dividends, return capital to shareholders, make capital contribution to Related Parties, or acquire equity in Related Parties.
General Interest Deduction Limitation Rule (GIDLR)
Applies where net interest expense exceeds AED12 million; deductible amount is capped at the higher of AED 12 million or 30% of adjusted EBITDA; excess can be carried forward for 10 years.
Comprehensive Table: Tax Treatment by Type of Interest
| Type of Interest | Description | Tax treatment |
| Capitalized Interest | Interest incurred during the construction or acquisition of a long-term asset, capitalized as part of its cost under IFRS | Not deductible in the year incurred. Deductible only through amortization over the asset’s useful like. Included in Net Interest Expenditure when amortized. Must be excluded from depreciation when calculating EBITDA to avoid double counting |
| Finance Leases and Hire Purchase | Leases where the lessee substantially assumes the risks and reward of ownership or purchase option. | Interest portion of lease payments is deductible by the lessee and considered interest income for the lessor. Deduction aligns with IFRS amortization schedule. |
| Operating or the Non – Finance Leases | Traditional rental arrangements where the lessor retains ownership and risks | Deductible to the extent of a calculated finance element. Formula – based approach to extract finance charge when not disclosed in IFRS |
| Islamic Finance Instruments | Includes Murabaha, Ijara, Sukuk, and other Sharia-compliant financing structures. | Markup/profit elements are treated as interest if classified as debt under IFRS. If treated as equity, payments are classified as non – deductible dividends |
| Bond Discounts and Premiums | Debt issues below (discount) or above (premium) face value | Amortized over the life of the instrument and treated as deductible interest expense. |
| Repurchase Agreements (Repos) | Sale of securities with an agreement to repurchase at a higher price. | Difference between sale and repurchase price is treated as interest and deductible by the seller (borrower) |
| Stock Lending Agreements | Temporary transfer of securities in return for collateral and lending fee | Lending fee is treated as interest. Deductible by borrower, taxable for lender. Dividend compensation may retain dividend character |
| Securitization and Asset-Backed Securities | Structured financial instruments backed by interest yielding assets (e.g. mortgages, receivables). | Returns from the instrument are treated as interest if sourced from interest-bearing assets. Deductible if linked to financial. |
| Factoring and Invoice Discounting | Sale of receivables at a discount, with or without recourse. | Discount is treated as interest and deductible. Often seen in working capital arrangements |
| Foreign Exchange Movements on Interest | Gain or losses due to FX changes on interest payments in foreign currencies | Only Forex movements related to the interest portion are treated as deductible interest. Forex on principal is excluded |
| Loan Arrangement, Guarantee, Commitment, and Underwriting Fees | Fees incurred to raise finance or secure funding commitments. | Treated as interest. Deductible whether expensed or capitalized, subject to limitation rules. Must be Included in Net Interest Expenditure |
| Derivative Instruments | Interest rate swaps or similar derivatives used for managing finance costs. | Only the interest component is treated as deductible interest |
| Hybrid instruments | Financial instruments with features of both debt and equity, such as convertible bonds or preference shares. | If classified as debt under IFRS payments are deductible interest. If classified as equity, returns are treated as non – deductible dividends |
| Installment sales | Deferred payment arrangements with financing element in the mark-up | Mark up over time is treated as interest. Deducted over the payment period in line with accrual or cash basis accounting |
| Late Payment Charges | Charges imposed for delayed payment of liabilities, either commercial or statutory. | Commercial charges are treated as interest and is deductible. Statutory penalties, such as VAT fines are not deductible |