I. What kinds of Interest can be claimed as deduction? 

According to UAE Corporate Tax Law, interest expenses that can be deducted are broadly defined to include different types of financing costs, as long as they meet the general requirements for deductibility (for example, they must be for business purposes, not capital unless capitalized, and not tied to exempt income). The following types of interest can be deducted: 

  • Money or Credit Costs: Payments made for using borrowed money or credit. 
    Example: A retailer borrows AED 1 million at 5% interest and pays back AED 50,000 each year. You can deductible this. 
  • Discounts and Premiums: Costs or benefits of borrowing, such as bond discounts. 
    Example: If you buy an AED 10,000 bond for AED 9,800, you get an AED 200 discount, which is treated as interest over the life of the bond. 
  • Islamic Finance Payments: Profits or markups from Sharia-compliant tools. 
    Example: A Murabaha contract where a bank sells equipment for AED 110,000 (bought for AED 100,000) and adds AED 10,000 in interest. 
  • Similar Payments: Costs from financial deals that act like interest. 
    Example: A repo deal in which securities are sold for AED 500,000 and then bought back for AED 510,000 earns AED 10,000 in interest. 
  • Finance-Related Costs: Fees for raising funds. 
    Example: if you pay AED 5,000 to get an AED 200,000 loan, you can deduct that amount as interest. 

 

Timing: The accounting method determines whether interest is deductible: when it is paid (Cash Basis) or when it is accrued (Accrual Basis). 
Example: A Cash Basis business pays AED 20,000 in interest on a loan in 2025 and deducts it in 2025. 

💸II.  Difference between General and Specific Deduction? 

There are two different rules in the UAE Corporate Tax Law that limit how much interest you can deduct: the Specific Interest Deduction Limitation Rule and the General Interest Deduction Limitation Rule. This is how they are different: 

  • Specific Interest Deduction Limitation Rule (Section 5):  

  • Purpose: If borrowing is meant to avoid UAE Corporate Tax, which is often the case in transactions between related parties, deductions are not allowed. 

  • How it Works: If the loan moves profits to places with low or no taxes, it can’t deduct interest. 

  • Example: A a company in the UAE borrows AED 2 million at 4% (AED 80,000 in interest) and then lends it to a related company in a country with no taxes at 1% (AED 20,000). The AED 80,000 is not deductible due to tax avoidance. 

  • For Non-Residents: Deductions are allowed unless it can be shown that they are trying to avoid paying taxes. 
    Example: A foreign company’s UAE branch borrows AED 1 million to run its business. The interest is tax-deductible unless avoidance is shown. 

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📊 General Interest Deduction Limitation Rule (Section 6) 

  • Purpose: Caps deductions to make sure everyone is treated fairly, no matter what their tax avoidance goals are. 
  • How it Works: Limits deductions to the higher of 30% of Adjusted EBITDA or AED 12 million, based on Net Interest Expenditure (interest paid minus earned, excluding disallowed or exempt-project interest). You can carry over excess for 10 years. 
  • Example: A company with AED 50 million EBITDA has AED 70,000 Net Interest Expenditure (AED 100,000 paid, AED 30,000 earned). The limit is AED 15 million (30% of EBITDA). The AED 70,000 is fully deductible. 
  • Example: A company pays AED 3.05 million in interest on mixed financing. This means that AED 150,000 of tax-free income is not included, so AED 2.9 million is deductible interest. The Net Interest Expenditure is AED 1.9 million after taking out AED 1 million in deposit income. The highest amount that can be deducted is AED 19.5 million, which is either AED 12 million or 30% of AED 65 million Adjusted EBITDA. Since AED 1.9 million is less than the limit, it can be fully deducted. 

Key Difference: The Specific Rule is aimed at tax avoidance schemes and doesn’t allow any deductions at all. The General Rule, on the other hand, sets a universal limit on Net Interest Expenditure and lets you carry over any extra. 

III. Which interests cannot be claimed as deduction?

Under UAE Corporate Tax Law, some interest expenses can’t be claimed as deductions because of general conditions or specific limitation rules. These are: 

  • Interest Not for Business Purposes: Interest on loans not wholly and exclusively for business purpose. 
    Example: I nterest on an AED 10,000 personal loan for a manager’s vacation is not tax-deductible, but interest on an AED 50,000 loan for office equipment is. 
  • Capitalized Interest (Unless Deducted via Depreciation): Interest is a capital expense, unless it is part of a depreciable asset. 
    Example: You can’t directly deduct interest on an AED 1 million factory loan, but you can capitalize it and deduct it through depreciation. 
  • Interest Tied to Exempt Income: Interest on loans that are used to generate tax-exempt income. 
    Example: A loan of AED 500,000 to earn tax-free dividends will cost AED 25,000 in interest, which cannot be deducted. 
  • Interest Blocked by Specific Limitation Rule: Interest from arrangements made to avoid paying UAE Corporate Tax. 
    Example: UAE company borrows AED 2 million at 4% and lends it to a related  no- tax company at 1% has its AED 80,000 interest disallowed. 
  • Non-Finance Costs Misclassified as Interest: Interest payments are not deductible for costs like paying back the principal or giving customers a discount for paying early (for example, 10% off for paying for goods early). 

 

Special Note: The General Interest Deduction Limitation Rule says that interest can be partially disallowed if it goes over the limit (30% of Adjusted EBITDA or AED 12 million), but any extra can be carried forward for 10 years. 

IV. Exceptions to the General Interest Deduction Limitation Rule 

    • The UAE Corporate Tax Law’s General Interest Deduction Limitation Rule doesn’t apply to all organizations or conditions. Below are the key exceptions: 

      Banks and Insurance Providers 
      The General Interest Deduction Limitation Rule does not apply to banks and insurance companies, although their interest expenses still have to meet the general deductibility rules (e.g., business purpose, not for exempt income). 

      • Example: A bank pays AED 10 million in interest on deposits and makes AED 15 million on loans. The AED 10 million is not subject to the limit, but it must be deducted according to normal regulations. 
      • Group Context: If a bank or insurance company is part of a group with other Taxable Persons (not banks or insurance companies), the non-exempt firms are nonetheless subject to the regulation. 
      • Example: group has a bank (AED 5 million in interest income and AED 3 million in interest expense) and a trading company (AED 2 million in interest expense). The AED 2 million from the trading company is included in the rule, but the bank’s numbers are not included in the group’s limit calculation. 

      Individuals Running a Business 
      The General Interest Deduction Limitation Rule does not apply to sole proprietors that run a business, like a freelance designer. The law does apply, though, if the firm is run by a company. 

      • Example: A freelance designer’s interest charges are not subject to the regulation, but a design company’s expenses are. 

      Old Loans (Before December 9, 2022) 
      If the terms of the loan have not changed materially, the General Interest Deduction Limitation Rule does not apply to interest on loans made before December 9, 2022. 

      • Example: AED 1 million loan from 2021 with the same terms contains interest that can be deducted without any limits. 

      Qualifying Infrastructure Projects 
      If a project is for the UAE public, like a highway or a hospital, it doesn’t have to pay taxes if it meets certain standards, such having assets that last for more than 10 years and being in the UAE. 

      • Example: The restriction doesn’t apply to interest on a loan for a public hospital project. 

      Small Businesses 
      Small Business Relief is available to businesses that make less than AED 3 million in revenue. This means they won’t have to pay taxes on that money. You can’t deduct interest during relief years, but you can carry over amounts that were previously not authorized. 

      • Example 1: A store that makes AED 2 million in sales in 2025 chooses relief, has no taxable income, and can’t deduct AED 50,000 in interest. There was no relief in 2024, and the company made AED 4 million in revenue. It had AED 100,000 in interest, deducted AED 80,000, and carried over AED 20,000. 
      • Example 2: The store doesn’t get any help in 2025 (AED 2 million in sales, AED 1.8 million in costs, and AED 50,000 in interest). The taxable income is AED 150,000, and the AED 50,000 interest can be deducted. 
      • Example 3: In 2026, it makes AED 3.5 million in revenue and doesn’t get any relief. It has a limit of AED 300,000 and deducts AED 60,000 in interest and AED 20,000 that it carried forward from 2024. 

      Exempt Entities 
      The restriction doesn’t apply to government agencies or extractive industries (like oil production) when they’re doing their principal jobs. However, the restriction does apply to side enterprises that make money. 

      • Example: An oil company’s investment in extraction is not taxed, but its interest in a taxable retail arm is. 

      Non-Residents 
      The General Interest Deduction Limitation Rule only applies to income from a UAE Permanent Establishment or connection, not to income from other sources in the UAE. 

      • Example: A non-resident’s interest expense for a UAE branch is subject to the law, while interest on other UAE income, like royalties, is exempt. 

     

 

Conclusion

Understanding and applying UAE’s interest deduction rules is key to managing your corporate tax liability effectively. By knowing what qualifies, what doesn’t, and the differences between general and specific limitations, businesses can legally optimize deductions while staying compliant.