Corporate Tax UAE

Is Your UAE Business Loan Interest Tax-Deductible? The 30% EBITDA Rule Most CFOs Miss

UAE business loan interest tax deductible 30 percent EBITDA rule 2026

9 min read

Does UAE Corporate Tax Limit How Much Interest You Can Deduct?

Yes. Under Article 30 of Federal Decree-Law No. 47 of 2022, UAE corporate tax law caps the amount of Net Interest Expenditure a business can deduct at 30% of accounting EBITDA per tax period. Any interest above that cap is disallowed for that year, though it can be carried forward to future periods. In this guide, Qaspro Global breaks down every rule, threshold, exemption and worked example you need to know.

What Is the UAE Interest Deduction Limitation Rule?

The General Interest Deduction Limitation Rule (IDLR) restricts how much net interest a UAE business can deduct when calculating its taxable income. It was introduced under Article 30 of FDL 47/2022 and is detailed in Ministerial Decision No. 126 of 2023. The rule exists to prevent profit-shifting through excessive debt loading, a common international tax avoidance technique.

The core principle is simple: your deductible Net Interest Expenditure cannot exceed 30% of your accounting EBITDA for the tax period. If your net interest exceeds that threshold, the excess is disallowed and added back to taxable income. However, the disallowed amount is not lost permanently. It can be carried forward and deducted in future tax periods when EBITDA is higher.

Who Does the 30% EBITDA Rule Apply To?

The rule applies to all UAE resident taxable persons subject to corporate tax. However, certain businesses and situations are excluded entirely:

Entity / Situation	Subject to IDLR?	Legal Basis
UAE resident companies (mainland and free zone)	Yes	Article 30, FDL 47/2022
Banks and insurance providers	No (exempt)	Article 12(5), MD 126/2023
Qualifying Infrastructure Project Persons	No (exempt)	Article 14, MD 126/2023
Debt entered into before 9 December 2022	No (historical exemption)	Article 11, MD 126/2023
Net Interest Expenditure below AED 12 million	No (de minimis)	Article 8, MD 126/2023

Qualifying Infrastructure Projects are projects exclusively for UAE public benefit (transport, utilities, education, healthcare) where assets must last at least 10 years and all interest income and expenditure arises within the UAE.

What Is the AED 12 Million De Minimis Threshold?

Under Article 8 of Ministerial Decision 126 of 2023, the 30% EBITDA cap does not apply at all if your Net Interest Expenditure for the tax period does not exceed AED 12,000,000. This is the de minimis safe harbour. Most small and medium businesses in the UAE will never hit this threshold and are therefore unaffected by the rule entirely.

Where Net Interest Expenditure does exceed AED 12 million, the business may deduct the higher of:

AED 12,000,000 (the de minimis floor), or
30% of accounting EBITDA for the tax period

If the tax period is shorter or longer than 12 months, the AED 12 million threshold is adjusted proportionally.

How Is Net Interest Expenditure Calculated?

Net Interest Expenditure is total interest expenditure minus total interest income for the tax period. The definition of “interest” under MD 126/2023 is broad and includes more than just bank loan interest. It covers:

Interest on performing and non-performing debt instruments
Finance element of finance and non-finance lease payments (Article 5)
Islamic financial instrument profit distributions (Article 4)
Guarantee fees, arrangement fees and commitment fees (Article 3)
Foreign exchange gains and losses accruing from interest (Article 6)
Interest components on forward contracts, futures, options and swap agreements used to hedge financing risk (Article 3)
Capitalised interest when amortised over the asset life (Article 7)

This wide definition means businesses with operating leases, hire purchase arrangements or Islamic finance facilities must include those finance elements in their net interest calculation.

How Is EBITDA Calculated for the Interest Limitation Rule?

Under Article 9 of MD 126/2023, accounting EBITDA for the IDLR is the greater of AED 0 or taxable income (calculated under Article 20 of FDL 47/2022), plus:

Net Interest Expenditure for the tax period
Depreciation and amortisation taken into account in calculating taxable income
Any interest income or expenditure relating to historical financial liabilities held before 9 December 2022

Interest income and expenditure relating to Qualifying Infrastructure Projects must be excluded from the EBITDA calculation.

Worked Example: Does the 30% Rule Bite?

Here is a practical example for a UAE mainland company with the following figures for its first corporate tax period:

Line Item	Amount (AED)
Taxable Income (before interest add-back)	10,000,000
Net Interest Expenditure (interest paid minus received)	18,000,000
Depreciation and Amortisation	5,000,000
Accounting EBITDA (10M + 18M + 5M)	33,000,000
30% of EBITDA (deductible cap)	9,900,000
De minimis floor	12,000,000
Deductible amount (higher of 30% or AED 12M)	12,000,000
Disallowed Net Interest (added back to income)	6,000,000
Carry forward to next tax period	6,000,000

In this example, the business has AED 18 million in net interest but can only deduct AED 12 million (the de minimis floor is higher than 30% x AED 33M = AED 9.9M). The remaining AED 6 million is disallowed this year but carried forward.

What Happens to Disallowed Interest? The Carry-Forward Rule

Disallowed Net Interest Expenditure is not permanently lost. It can be carried forward indefinitely and deducted in future tax periods, subject to the 30% EBITDA cap applying in those future years. This is similar to the tax loss carry-forward mechanism under Article 37 of FDL 47/2022, which Qaspro Global has covered separately.

For companies that are part of a Tax Group, the rules under Article 12 of MD 126/2023 apply:

When a subsidiary joins a tax group, its carried-forward Net Interest Expenditure can only be used against income attributable to that subsidiary
When a subsidiary leaves a group, the group’s carry-forward stays with the parent (except amounts originally attributed to the departing subsidiary)
On full cessation of a tax group, the parent retains any remaining carry-forward

Are Loans Taken Before 9 December 2022 Exempt?

Yes. Under Article 11 of MD 126/2023, Net Interest Expenditure on debt instruments whose terms were agreed before 9 December 2022 (the date UAE corporate tax was formally enacted) is excluded from the General Interest Deduction Limitation Rule entirely. This historical exemption also covers hedging contracts entered into for the sole purpose of reducing interest rate risk on those pre-December 2022 liabilities.

The exemption only applies to the net interest actually attributable to those historical instruments. If the loan terms were later amended or a fresh drawdown was made, only the original amounts at the pre-December 2022 terms qualify.

Does the Rule Apply to Islamic Finance?

Yes. Under Article 4 of MD 126/2023, the interest-equivalent component of Islamic financial instruments (murabaha, ijara, sukuk and similar Sharia-compliant structures) is treated as interest for the IDLR. This ensures the rule applies equally whether a business uses conventional or Islamic financing. The economic substance, not the legal form, determines the treatment.

Frequently Asked Questions

What is the UAE interest deduction limitation rule?

The UAE interest deduction limitation rule caps deductible Net Interest Expenditure at 30% of accounting EBITDA per tax period under Article 30 of Federal Decree-Law No. 47 of 2022. It is detailed in Ministerial Decision No. 126 of 2023. Disallowed interest can be carried forward to future tax periods.

Does the 30% EBITDA rule apply to small businesses?

No. If your Net Interest Expenditure for the tax period is AED 12 million or less, the rule does not apply at all. This de minimis threshold under Article 8 of MD 126/2023 means most UAE SMEs are completely unaffected. Only larger businesses with significant debt financing need to calculate the cap.

What counts as interest under the UAE corporate tax law?

Interest includes bank loan interest, finance lease payments, Islamic finance profit distributions, guarantee and arrangement fees, foreign exchange movements on interest, and interest components on hedging instruments. The definition under MD 126/2023 is intentionally broad to prevent avoidance through alternative financing structures.

Can I carry forward disallowed interest to future years?

Yes. Net Interest Expenditure that exceeds the 30% EBITDA cap in one tax period can be carried forward and deducted in a future period, subject to the 30% cap applying in that future period. There is no statutory time limit on the carry-forward period under FDL 47/2022.

Are banks and insurance companies subject to the interest deduction limitation?

No. Banks and insurance providers are excluded from the General Interest Deduction Limitation Rule. If a bank is part of a tax group, its interest income and expenditure is disregarded entirely when calculating the group’s Net Interest Expenditure and EBITDA for IDLR purposes (Article 12(5) of MD 126/2023).

Does the rule apply to loans taken before UAE corporate tax was introduced?

No. Debt instruments whose terms were agreed before 9 December 2022 are exempt from the General Interest Deduction Limitation Rule under Article 11 of MD 126/2023. The exemption covers the net interest attributable to the original terms of those historical liabilities.

Does the interest deduction rule apply to operating leases?

Yes, partially. The finance element of both finance leases and non-finance (operating) leases is treated as interest under Article 5 of MD 126/2023. The finance element is calculated as the proportion of the lease payment attributable to the financing cost rather than the underlying asset use.

What is the penalty if I get the interest deduction calculation wrong?

Incorrectly deducting disallowed interest reduces taxable income and understates corporate tax. The FTA can reassess tax, charge late payment penalties of 2% per month and issue administrative penalties under Cabinet Decision 75 of 2023. Voluntary disclosure via EmaraTax is the recommended route if an error is discovered.

Need Expert Help?

The UAE interest deduction limitation rule affects any business carrying significant debt, operating leases or Islamic finance facilities. Qaspro Global’s corporate tax consultants can review your financing structure, calculate your EBITDA cap, and ensure your tax return correctly reflects deductible and disallowed interest. Contact us today for a free consultation.