Interest Deduction Rules for UAE Corporate Tax: Understanding the AED 12 Million Cap
If your business borrows money, the interest you pay on those loans is usually a cost you can claim when you work out your UAE Corporate Tax. But there are strict limits, and you need to know exactly how they work so you can avoid mistakes.
Let’s break down the law in plain language so you always know what you can and cannot deduct and how to keep your business in the clear.
How Interest Deductions Work
The UAE Corporate Tax law says you can deduct interest paid on loans for business purposes. This helps businesses manage their finances and encourage growth, but the law also wants to stop people from loading up on unnecessary debt just to reduce their taxes.
That’s why the government put a cap in place so only reasonable amounts of interest are deductible.
The AED 12 Million Rule: What Is It?
For most businesses, if your net interest cost for the year is twelve million dirhams or less, you can deduct the whole amount without any extra calculations.
Here’s how you find your net interest cost:
Take the total interest you paid during your tax year and subtract any interest your business earned. If the result is twelve million dirhams or less, you can deduct it all.
Example:
Let’s say your business paid ten million dirhams in interest during the year, but you also earned one million dirhams in interest from your bank savings. Your net interest is nine million dirhams. Because this is less than the twelve million dirham threshold, you can claim the full nine million dirhams as a deduction when you file your return.
What If Your Interest Is More Than AED 12 Million?
Once your net interest cost goes above twelve million dirhams, the deduction becomes limited. Here’s where the government uses a simple comparison to make sure you’re not deducting too much:
You are allowed to deduct the larger amount between
- twelve million dirhams, or
- thirty percent of your business’s adjusted EBITDA for the year.
Adjusted EBITDA stands for earnings before interest, taxes, depreciation, and amortization, but the law gives a special way to calculate it.
Calculating Adjusted EBITDA for UAE Corporate Tax
You figure out adjusted EBITDA by starting with your taxable income, then adding back
- net interest costs,
- depreciation,
- amortization,
- and any required adjustments for older loans or specific financial assets from before December 2022.
Once you have that number, multiply it by thirty percent. If the result is higher than twelve million dirhams, you can deduct the higher number. If it is lower, you still get to claim the full twelve million.
This method keeps the system fair and stops businesses from using too much debt just to lower their taxes.
Example Scenario: Putting It All Together
Imagine your net interest cost is fifteen million dirhams for the year.
Next, calculate your adjusted EBITDA and find thirty percent of that figure.
- If thirty percent of your adjusted EBITDA is twelve million dirhams or less, you can still deduct the full twelve million.
- If thirty percent of your adjusted EBITDA is fourteen million dirhams, you would be able to deduct the higher amount, which is fourteen million.
This way, the system always gives you the greater of twelve million or the percentage of your real business profits.
Special Rules and Exemptions
Not every business is subject to these rules. Some types of companies and loans are treated differently. The interest cap does not apply to
- banks or insurance companies,
- natural persons (meaning individuals who are not acting as companies),
- loans that were already in place before December 9, 2022 (these are sometimes called grandfathered loans),
- and qualifying infrastructure projects, which have their own specific guidelines.
Carrying Forward Disallowed Interest
If you find yourself limited by the cap and can’t deduct some of your interest this year, the law lets you carry forward the disallowed interest. You can use this “unused” deduction in any of the next ten tax years, as long as you have enough profits in the future. However, you cannot transfer it to another business or person. It only applies to your own tax filings.
Why It Matters to Get Interest Deductions Right
Getting these calculations wrong can mean underpaying or overpaying tax, which could lead to penalties or unwanted audits. It’s important to keep all loan agreements, payment proofs, and calculation workings on file so you can easily answer any FTA questions.
A lot of business owners now use digital tools or accounting software, like Tax Star, to track their interest expenses, stay on top of caps, and carry forward any unused deductions automatically.
FAQs
Can I deduct interest on any business loan?
Yes, as long as the loan is for a real business need and you stay within the limits set by the law.
What if my business is a bank or insurance company?
The cap does not apply to banks and insurers, as they have different industry standards and rules.
Can I claim interest on old loans from before December 2022?
Yes, loans that were set up before that date may be exempt from the cap, but only if they meet certain conditions under the law.
If I cannot claim all my interest this year, what should I do?
You can carry forward the disallowed amount for up to ten years and claim it in a future year when you have enough profits.
How do I prove my interest deduction is correct?
Always keep your loan contracts, bank statements, and detailed calculation notes. Digital tools can make this process much easier.
Do all companies have to follow the AED 12 million rule?
Most do, but there are exceptions. Always check your business type and get advice if you’re not sure.
What happens if I claim too much interest by mistake?
The FTA can reassess your tax, disallow the extra deduction, and possibly charge a penalty.
Is it worth using compliance software like Tax Star?
Many businesses find it makes life easier, keeps records tidy, and ensures they don’t miss out on valid deductions.
Do I need to recalculate EBITDA each year?
Yes, your adjusted EBITDA might change year to year as your profits and business costs change.
Can I transfer my unclaimed interest deduction to another business?
No, carry forward rules only apply within your own business, not across to others.
If you have questions about how the AED 12 million interest cap works, or need to get your numbers straight before the next filing, reach out to your advisor or use trusted compliance tools to keep your business tax-smart and penalty free.
