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Compliance Corner: Tax group adjusts net interest expenses in occurrence order

The provisions of the net interest expenditure are applicable to the tax group in its entirety as the tax group is considered a single taxable person

The UAE corporate tax law (the law) requires that net interest expenditure is allowed to the taxable person up to 30 per cent of adjusted Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or Dh12 million whichever is higher, and the remaining net interest expenditure can be carried forward for further period of 10 tax periods of the tax group.

The term "net interest" refers to the surplus of interest expenses over interest income. Exempt income is excluded while computing adjusted EBITDA, and any interest expense or income associated with exempt income is also disregarded in determining the net interest figure.

The provisions of the net interest expenditure are applicable to the tax group in its entirety as the tax group is considered a single taxable person. This implies that the limitation and carryforward mentioned above are calculated at the tax group level. Where the combined net interest expenses of the tax group exceed Dh12 million and the tax group does not have sufficient adjusted EBITDA to offset its net interest expenses, then 30 per cent cap on interest deduction will be enforced at the group level, even if some members of the tax group would have individually enough EBITDA to offset their net interest expenses.

If a subsidiary departs from the tax group or there is a change in the parent company, the net interest expenses will stay within the tax group unless they are pre-grouping unutilised net interest expenses of the subsidiary which will be carried forward by the subsidiary. Where the group is dissolved and the parent company remains a taxable person, the unutilised net interest expenses will stay with the parent company. Where the parent company ceases to exist, the associated net interest expenditure of the tax group will remain unutilised unless it is replaced by another parent company. In the scenario where the parent company merges with another taxable entity and ceases to exist as a result, any unused net interest expenses of the tax group will remain accessible if the new parent company of the tax group becomes the legal successor.

Within tax group losses, various categories exist, including pre-grouping losses, restricted tax group's tax losses, unrestricted tax group's tax losses, transferred losses, and losses acquired through business restructuring. Regarding group net interest expenditures, pre-grouping and group net interest expenditures may occur but there is no concept of restricted tax group net interest expenditure like restricted tax group's tax losses. Furthermore, a taxable person is not permitted to pass on its net interest expenses to another person, even when such net interest expenditure is transferred as part of a business restructuring process.

The net interest expenditures will be offset in the sequence of their occurrence after adjusting the current period net interest expenditures of the group. Where multiple unused net interest expenditures are eligible for utilisation and they originated from tax periods ending on the same date, there is no obligation to adhere to the chronological order to adjust such net interest expenditures. Pre-grouping net interest expenditures are permitted up to 30 per cent of the group's adjusted EBITDA or Dh12 million, whichever is higher, and the associated subsidiary must possess adequate taxable income to offset these net interest expenditures.

As mentioned above there is no concept of restricted net interest expenditure like we have in group losses. Moreover, a taxable person including the tax group cannot transfer its net interest expenditure to another person or group like they can transfer losses under article 37 and article 38 of the law. Where article 37 and article 38 are applied, the net interest expenditures will remain with the transferor, and where the transferor ceases to exit, any unutilised net interest expenditure tied to the transferor would be sacrificed.

The general interest deduction limitation rule does not affect banks, insurance providers, and specific other designated taxable persons such as natural persons, taxable person engaged in qualifying infrastructure projects, and taxable persons who took out a loan prior to December 9, 2022, and there are no modifications to the loan terms. If any of these entities are part of a tax group, the income, or expenses of such a member will be disregarded when calculating the total net interest expenditure and EBITDA of the tax group.

The groups should meticulously assess the management of net interest expenses and proceed with caution when determining their taxable income.

(Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above article is not an official view of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at mahar@kresscooper.com)