Understanding the 30 Percent EBITDA Rule for Interest Deduction Under UAE Corporate Tax
If your business borrows money, interest payments can often be claimed as a tax deduction. But when your annual net interest costs go over twelve million dirhams, the UAE Corporate Tax law sets a special rule. This rule makes sure businesses cannot use large interest payments just to shrink their tax bills.
Let’s break down how this cap works, how to calculate your adjusted EBITDA, and what to watch out for along the way.
The Rule in Plain Language
Once your net interest cost is more than twelve million dirhams in a single tax year, you must follow what’s known as the general interest deduction limitation. This means you can only deduct the greater amount between these two figures:
- The fixed allowance of twelve million dirhams, or
- Thirty percent of your adjusted EBITDA
So if your business is carrying a lot of debt, this law limits how much interest you can claim as a deduction.
What Is Adjusted EBITDA for UAE Corporate Tax?
EBITDA is short for Earnings Before Interest, Taxes, Depreciation, and Amortization. In the UAE tax system, adjusted EBITDA has a specific meaning.
You work it out by starting with your taxable income before making any interest deduction limit or tax loss adjustments.
To this, you add back your net interest costs for the year, as well as depreciation and amortization expenses.
If you have special interest from older loans that were taken before December 2022, you may also need to include or exclude those amounts, depending on your election.
So, adjusted EBITDA is your taxable income plus the interest, depreciation, amortization, and any required adjustments for earlier loans.
Calculating the 30 Percent Cap
Once you have your adjusted EBITDA for the year, multiply it by thirty percent. This figure is your interest deduction cap for that tax period.
If this number is more than twelve million dirhams, you can deduct the higher amount. If it’s less, you still get to deduct the full twelve million.
For example, if your adjusted EBITDA is fifty million dirhams, thirty percent would be fifteen million dirhams. That means your interest deduction limit for the year would be fifteen million, because it is higher than the twelve million minimum.
Key Steps for Accurate Calculation
Follow these simple steps to get your interest deduction right:
- Add up your net interest costs for the tax year.
- Work out your taxable income before applying the deduction cap or tax loss relief.
- Add back the net interest, depreciation, and amortization.
- Adjust for any “grandfathered” loans, if those apply.
- Multiply your adjusted EBITDA by thirty percent.
- Compare that figure to the fixed twelve million dirham allowance. Deduct whichever is higher.
Mistakes to Watch Out For
It’s easy to make errors with this rule, so keep an eye out for the following pitfalls:
- Not using the cap when your net interest goes over twelve million dirhams. Every business with interest costs above this level must apply the rule, no exceptions.
- Mixing up accounting numbers with tax numbers. Depreciation, amortization, and interest costs must be calculated according to UAE tax law, not just your regular accounts.
- Getting the treatment of capitalized interest wrong. Sometimes interest is included in the cost of an asset, but you may still need to apply the limitation, depending on the tax treatment.
- Including interest that has already been disallowed under other parts of the law. If you have interest that does not pass transfer pricing, anti-avoidance, or related party rules, you need to leave it out of the net interest figure before you apply the main cap.
What If Your Deductible Interest Is Capped?
Sometimes your actual interest payments are higher than what you’re allowed to deduct. The good news is, you do not lose that deduction forever. Any disallowed interest can be carried forward for up to ten future tax years.
In each future year, you can use this carried-forward interest if you have room under the thirty percent EBITDA rule and the twelve million dirham minimum. However, you cannot transfer unused interest deductions to another business, even if you’re part of a tax group or related companies.
Tips for Staying Compliant
Getting these calculations right is important for every business. Here’s how you can keep things smooth:
- Keep clear records of all your loan agreements, payment schedules, and calculation notes.
- Double check your depreciation and amortization numbers match the tax rules, not just your accounting system.
- Use accounting tools or business compliance software like Tax Star to help automate your calculations and spot any mistakes.
- Review your interest deductions every year, especially if your business is growing and taking on new debt.
Frequently Asked Questions
Who must follow the thirty percent EBITDA rule?
Any business with net interest expenses above twelve million dirhams in a tax year.
What happens to disallowed interest?
You can carry it forward for up to ten years, and use it if you have unused deduction space in the future.
Can I transfer my unused interest deduction to another company?
No, the rules do not allow transfers, even within a group of related companies.
What if I forget to apply the cap?
The FTA can deny the extra deduction, reassess your tax return, and may charge a penalty.
Are the numbers based on tax figures or accounting records?
Always use the numbers according to tax law. Sometimes they will be different from your accounting numbers.
Is interest on old loans exempt from this rule?
Some “grandfathered” loans taken before December 2022 may be exempt, but you must make a formal election and check the details.
What if my adjusted EBITDA is low, but I still have a lot of interest?
You will be able to deduct at least twelve million dirhams, but no more unless thirty percent of your adjusted EBITDA is higher.
Should I use compliance software?
It is a good idea. Many UAE businesses rely on platforms like Tax Star to get their calculations right and keep track of carryforwards.
