If you own a company in the UAE, chances are you have put your own money into it at some point and called it a “shareholder loan.” When Corporate Tax arrived, most owners started asking their business advisory accountant one question about that money: what interest rate should I charge so the taxman is happy?
That is actually the second question. The first question — the one the Federal Tax Authority (FTA) will ask before anything else — is much more basic: is this money really a loan at all?
Under the UAE’s transfer pricing rules, read together with the OECD’s international guidance (Chapter X, which the FTA’s own Transfer Pricing Guide follows), money you put into your company can be treated in one of three ways:
1. Debt — a genuine loan. Interest can be charged and, within limits, deducted from taxable profits.
2. Equity — an investment in your own company, like buying shares. The return on it is a dividend, and dividends are never tax-deductible.
3. Quasi-equity — money labelled a loan but behaving like an investment. The FTA can recharacterise it, and then no interest deduction is allowed at all.
Get this wrong, and the expensive benchmarking study defending your interest rate is worthless — you have carefully answered a question the FTA never asked.
The golden rule: First decide what the money really is; only then price it. The FTA’s test is simple to state: would a bank or any independent lender have given this company this amount of money, on these terms? If the honest answer is no, the “loan” is probably not a loan for tax purposes — and the answer is not “charge interest anyway.” It is: no interest deduction, full stop.
Why your shareholder loan is definitely caught by these rules
Some owners assume transfer pricing is only for big multinationals moving money across borders. It is not. Here is why your loan is covered:
• Article 34 of the Corporate Tax Law says every transaction between related parties must be priced as if it happened between strangers — the “arm’s length” standard. A loan from you to your own company is exactly such a transaction. It makes no difference that both of you are in the UAE, or even in the same free zone.
• The AED thresholds you may have heard about (AED 40m, 4m, etc.) are only about paperwork — they decide whether you must file certain disclosure forms. They do not exempt any transaction from the arm’s length rule itself.
• It doesn’t matter how small your shareholding is. If you own 50% or more, you are a “Related Party” (Article 35). But if you are an individual with any shareholding — even 5% — you are a “Connected Person” under Article 36, which is stricter: any payment the company makes to you must be at market value and genuinely for the business.
Why does the label matter so much? Because the three outcomes are worlds apart:
| Real debt | Quasi-equity | Equity | |
|---|---|---|---|
| What you receive | Interest | Nothing deductible — treated like an investment return | Dividend |
| Can the company deduct it? | Yes — at a market rate, within the interest caps | No — none of it | No — dividends are never deductible |
| Where the FTA will attack | The interest rate | The loan itself | Rarely attacked |
How the FTA decides what your loan really is
The international test (OECD Chapter X) looks at how the arrangement would appear to an outsider. No single factor decides it — the overall picture does. The questions asked are refreshingly practical:
• Is there a date by which the money must be repaid? Or is it “whenever the company can afford it”?
• Is interest actually required — and actually paid? Or just written in the books at year-end?
• Could you, the lender, actually enforce repayment — and would you?
• Where do you rank if things go wrong? A real lender stands ahead of the owner. If you’d be paid last, after every supplier and bank, that looks like owner’s capital, not a loan.
• Is there any security? Banks take security; owners usually don’t.
• The killer question: would a bank have lent this money? If your company’s bank refused further facilities, and you then “lent” AED 20 million yourself, it is very hard to argue an independent lender would have done the same.
• What is the money for? Funding day-to-day working capital looks like a loan. Funding a long-term building, a start-up phase, or years of losses looks like owner’s investment.
• What happens when a payment is missed? A real lender writes letters. An owner usually just lets it slide.
One more point worth knowing: the answer doesn’t have to be all-or-nothing. If a bank would have lent your company AED 12 million but you advanced AED 20 million, the FTA can treat AED 12 million as debt and the extra AED 8 million as equity. The UAE has no fixed debt-to-equity ratio in its law — this “how much would a bank lend?” test effectively plays that role.
Actions speak louder than contracts — and the FTA is told to listen to actions
Here is the part most owners miss. Having a beautifully drafted loan agreement is not enough, because the rules explicitly say that what you actually do beats what you wrote down.
The OECD Guidelines (Chapter I, Section D.1, paragraphs 1.42–1.49 — with the key rule at 1.45–1.46) say the written contract is only the starting point. If the parties’ real behaviour doesn’t match the contract, the tax analysis follows the behaviour. Chapter X applies the same rule to loans specifically (paragraphs 10.4 and 10.12). And the UAE’s own Transfer Pricing Guide (CTGTP1) says the same thing: where conduct and contract diverge, conduct wins. This is not a foreign idea the FTA might borrow — it is written into the UAE’s own guidance. Lawyers call it substance over form. In plain terms: the FTA taxes the deal you actually did, not the deal you drafted.
An example of how this bites. Faisal Interiors signs a textbook five-year loan agreement with its owner: quarterly interest at a properly benchmarked rate, a repayment schedule, default clauses — everything a lawyer could want. But look at what actually happens: no interest is ever paid — it’s just added to the balance each quarter. Two repayment instalments are missed, and nothing happens: no letter, no revised schedule, no penalty. When the company later runs short of cash, the owner doesn’t demand his money back — he puts in more.
Judged by behaviour, this money isn’t acting like a loan. It is patient, never-enforced, at-risk money — exactly how an owner’s investment behaves. The FTA can treat it as quasi-equity and deny every dirham of interest deduction. And here is the cruel twist: the perfect agreement now makes things worse, because it proves you knew exactly what real loan behaviour looks like — and chose not to behave that way.
So how do you protect yourself? Document the behaviour, not just the contract:
• Actually move the money. Interest and repayments should leave the company’s bank account on schedule — not sit as year-end accounting entries.
• When a payment is missed, act like a bank would. Write a waiver letter, issue a revised schedule, charge default interest if appropriate. Keep the paper.
• Record the decisions. Board minutes approving the loan, reviewing it yearly, and explaining any forbearance.
• Re-check on every extension. Each time the loan is rolled over, re-test whether a bank would still lend, and refresh the interest rate benchmark.
• Tell one story everywhere. The loan should appear as debt — consistently — in the financial statements, the tax return, the TP disclosure form, and the Local File.
In an FTA review, the winning file is the one showing you behaved like a lender and a borrower for years. The agreement just confirms it.
One warning from the accountants. IFRS accounting often gets there first: an interest-free shareholder loan is typically split by the auditors on day one, with part of it booked straight to equity. The tax analysis isn’t bound by the accounting — but if your own audited accounts, prepared by your chartered accountant in Dubai, already call part of the “loan” equity, arguing with the FTA that all of it is debt is an uphill climb.
A tale of two structures — same money, opposite results
The setup. Mr. Faisal owns 100% of Faisal Interiors LLC in Dubai. He puts in AED 20 million to fit out a new showroom. The company’s bank has already said no to more lending.
Version A — how it usually happens. No agreement. No interest actually paid, but at year-end the accountant books an 8% interest charge — AED 1.6 million — as a tax deduction, backed by a benchmarking study on the rate. No repayment date. The money sits there for years.
Result: undocumented, open-ended, unsecured, funding a long-term asset, in an amount no bank would lend. This is quasi-equity. The entire AED 1.6 million deduction disappears — for every year it was claimed. And because Mr. Faisal is an individual shareholder (a Connected Person), the payment had to pass the market-value and genuinely-for-business tests anyway. The benchmarking study defended the rate on a loan that, for tax purposes, never existed — a scenario a financial accounting advisory service would flag well before the tax return is filed.
Version B — the same money, done properly. A written agreement for a AED 12 million loan — the amount a bank-style analysis says the company could actually borrow — over five years, with a repayment schedule and a benchmarked market rate that is actually paid. The remaining AED 8 million goes in honestly as capital.
Result: the AED 12 million looks, and behaves, like real debt. The interest is deductible — still subject to the general interest caps (broadly, 30% of tax-EBITDA, with a AED 12 million de minimis) and the special rule blocking related-party loans used to fund dividends. The AED 8 million claims no deduction and creates no argument.
Same AED 20 million. The only difference is whether you chose the answer — or left the FTA to choose it for you, years later, with penalties.
Why the FTA will look extra hard when the lender is an individual
When you personally lend to your company, something lopsided happens: the company deducts the interest (saving 9% tax), but you receive it as personal investment income — which is generally outside Corporate Tax entirely. A deduction on one side with no tax on the other is exactly the pattern every tax authority in the world examines hardest. Expect the FTA to do the same, and prepare the file accordingly.
Two other situations raise the stakes further. If a free zone company with 0% status (QFZP) is involved, arm’s length compliance is a condition of keeping that 0% — a recharacterised loan can threaten the status itself. On the brighter side, if both lender and borrower are ordinary UAE companies paying 9%, the sting is smaller: an upward adjustment on one side supports a matching downward adjustment on the other, which the FTA has confirmed (in CTP011) can be self-applied in the return for domestic transactions, with proper documentation.
What you should do before your next tax return
List every shareholder advance in the group and ask, honestly, the questions above — as the FTA would, not as the label reads. Paper the genuine loans properly, and then live by the paper: pay the interest, follow the schedule, react like a lender when things slip. Where the amount is more than a bank would lend, split it — loan up to the ceiling, capital for the rest. Make sure the accounts and the tax filings tell the same story. And only after all of that, commission the benchmarking study — for the loan that survives the test, in the amount that survives it.
How TSAC can help
TSAC, working as both transfer pricing adviser and business advisory accountant to shareholders and groups, helps work out what their funding really is, how much of it a lender-style analysis supports, what rate to charge, and how to document all of it under the UAE’s TP documentation rules — including fixing legacy shareholder loans before they are examined. The cheapest time to decide what your shareholder loan is, is before the FTA decides for you.
This publication is for general information only and does not constitute tax advice. Please contact TSAC for advice specific to your circumstances.