The UAE’s Interest Deduction Limitation Rule as per Article 30 Federal Decree-Law No. 47 of 2022 on Corporate Taxation aims to enhance fiscal transparency and to maintain adequate capital and not be excessively leveraged. While designed to prevent excessive interest deductions, its implications for capital-intensive industries necessitate a balanced approach.

Ministerial Decision no 126 of 2023 limits interest deductions to 30 per cent of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), with an exception allowing up to Dh12 million or 30 per cent of EBITDA, whichever is higher. Any excess interest is non-deductible and added to taxable income, increasing corporate tax liability.

1. Impact on Capital-Intensive and Commodity Trading Sectors

Industries such as real estate development, manufacturing, and commodity trading (including oil and energy trading) depend heavily on debt financing. As these sectors operate on thin margins, limiting interest deductions could increase tax burdens and affect competitiveness.

2. Increased Tax Burden Due to EBITDA-Based Limitation

While EBITDA is a common financial metric, using it as a deduction benchmark can significantly raise effective tax rates for businesses with substantial financing costs.

Illustrative Example:

• Annual Sales: Dh3 billion

• Net Profit: Dh30 million

• Interest Expenditure: Dh200 million

• EBITDA: Dh230 million

• Allowable Interest Deduction: 30 per cent of AED 230 million = Dh69 million

• Non-Deductible Interest: Dh131 million

• Adjusted Taxable Income: Dh161 million

• Tax Payable at 9%: Dh14,456,250

• Effective Tax Rate: 48.19 per cent

This increased tax rate poses financial challenges for debt-reliant industries, potentially discouraging investment.

Many countries apply sector-sensitive approaches to interest deduction rules. OECD guidelines emphasise proportionality, and several jurisdictions offer exemptions for highly leveraged sectors to maintain investment viability.

Gopu Rama Naidu, Founder and Managing Partner, KGRN Chartered Accountants

1. Industry-Specific Adjustments – Relief for commodity traders, infrastructure, and energy sectors to reflect their capital-intensive nature.

2. Increased Deduction Threshold – Raising the cap to 50 per cent of EBITDA to provide greater flexibility for debt-financed businesses.

3. Gradual Implementation – Phased adoption to help businesses transition to new financial structures.

4. Alternative Financial Metrics – Using debt-equity ratios instead of EBITDA-based limitations to ensure fairer taxation.

The Interest Deduction Limitation Rule is a key component of the UAE’s tax framework. However, an approach that considers sector-specific financial structures while maintaining fiscal integrity will enhance investment attractiveness. By engaging with businesses and industry experts, policymakers can foster a tax environment that supports long-term economic growth.

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