UAE announces maximum net interest rate cap for corporate tax

The UAE’s Ministry of Finance on Tuesday set out the maximum cap of interest that can be deducted by companies undertaking a business or business activity in the UAE, under the corporate tax law.

The ministry announced that the net interest expenditure that can be deducted is capped at the higher of 30 per cent of adjusted earnings before interest, tax, depreciation, and amortisation (Ebitda) or a safe harbour amount of Dh12 million.

It further clarified that tax groups with members who are banks and insurance providers must exclude these members’ income and expenditure when determining the 30 per cent Ebitda threshold.

The ministry and the Federal Tax Authority (FTA) have issued a number of clarifications about the corporate tax ahead of its implementation on Thursday, June 1, 2023. The UAE will levy a nine per cent corporate tax on profits of companies earning more than Dh375,000 as well as individuals generating a turnover of more than Dh1 million.

These new regulations are part of three new Ministerial Decisions issued for the purposes of corporate tax. These include Ministerial Decision No 125 of 2023 on Tax Grouping, Ministerial Decision No 126 of 2023 on General Interest Deduction Limitation Rule, and Ministerial Decision No 127 of 2023 on Unincorporated Partnerships.

Due to the importance of infrastructure projects in the country’s development projects, the Ministry clarified that such long-term projects that meet relevant conditions will not face restrictions on interest expenditure deductibility.

In addition, interest incurred on debt instruments before the law was published to the general public on December 9, 2022, will not be subject to the limitation rule.

Younis Haji Al Khouri, undersecretary of the Ministry of Finance, said the interest capping rules provide clarity to businesses when expensing debt financing costs and are built on OECD best global practice.

“The new decisions reflect how the UAE's corporate tax regime maintains flexibility and ensures straightforward tax processes to enable compliance while reinforcing the UAE's position as a leading business and investment hub,” he said.

Nirav Shah, director at Fame Advisory FMCC, said Decision Number 126 on interest deduction rules is very good news for business as the ceiling of 30 per cent of Ebitda will only apply once net interest expenses cross Dh12 million.

Tax grouping

With regard to tax grouping, the Ministry clarified that entities that are 95 per cent or more owned by the UAE parent can form or joint a tax group and will be treated as a single entity for corporate tax purposes.

Under the decision, the parent company must own at least 95 per cent of the voting rights and shares in each UAE entity. Also, all members of the tax group must be considered UAE residents for Corporate Tax purposes.

Forming a tax group simplifies the calculation and reporting of taxable Income by allowing the parent company to file a single tax return based on the aggregated taxable profit or loss of the group, it said.

“With tax grouping, groups are treated as if they were one entity which alleviates the administration and compliance burden,” said Al Khouri.

Unincorporated partnerships

The Ministry of Finance also clarified that unincorporated partnership is not subject to corporate tax, unless it is a corporate entity, meaning that individual partners will be taxed on their share of the income carried on by the partnership.

“Where unincorporated partnership elects to be treated as a taxable person in its own right, its decision is irrevocable once approved, and any change in the partnership composition must be notified to the Federal Tax Authority within 20 business days,” it added.

However, a foreign partnership that is treated as an unincorporated partnership must submit an annual declaration confirming that it is not taxed under foreign jurisdiction laws, and each partner is taxed individually based on their share of income.

All companies required to register

• UAE implements new corporate tax system: What businesses need to know