The introduction of UAE Corporate Tax at 9% from June 2023 has changed the financial calculus for UAE businesses. Areas previously straightforward — interest expense deductibility, related party loan structures, capital structure choices — now have direct tax implications that every business must understand.
Deductibility of Interest Expense Under UAE Corporate Tax
Under UAE Corporate Tax, general interest expense deductions are subject to a General Interest Deduction Limitation Rule: net interest expense is deductible up to 30% of EBITDA, with any excess carried forward to future periods. For businesses with significant debt, this rule can result in non-deductible interest — effectively increasing the cost of debt financing.
Certain interest expenses are specifically exempt from the limitation rule — including interest on loans from unrelated parties used for specific qualifying purposes. Businesses with high leverage should review their debt structures with their tax adviser to maximise deductibility.
Transfer Pricing on Related Party Loans
UAE Corporate Tax introduces transfer pricing rules that apply to transactions between related parties — including loans between group companies. Interest charged on intra-group loans must be at arm's length rates — rates that would apply between unrelated parties in comparable circumstances.
Group companies that have previously borrowed from or lent to each other at informal rates — or at zero interest — need to review and document their intercompany loan arrangements. Non-compliant arrangements risk tax authority adjustments and potential penalties.
Capital Structure Considerations Under UAE CT
The introduction of corporate tax makes the choice between debt and equity financing more nuanced than before. Debt (where interest is deductible subject to the limitation rule) creates a tax shield that reduces the effective cost of debt financing. Equity does not create a deductible expense.
However, the Interest Deduction Limitation Rule limits this benefit at high leverage levels. The optimal capital structure for UAE businesses now needs to balance the tax shield against the IDLR constraint — a calculation that requires business-specific modelling.
Banking Structuring for CT Efficiency
Businesses should review: which entity within their UAE group holds debt and pays interest; whether interest expenses currently exceed the IDLR threshold; and whether the documentation of related party loans meets transfer pricing requirements.
Gulf Oasis Commercial Brokers works alongside corporate tax advisers to ensure banking and finance structures are optimised for both commercial and tax efficiency.