As part of its commitment to align with international tax standards and curb base erosion and profit shifting (BEPS), the United Arab Emirates (UAE) introduced interest deductibility limitation rules in its Corporate Tax framework. One of the most significant of these is the 30% EBITDA cap on net interest expenses. This rule affects how much interest a business can deduct from its taxable income, especially if it is part of a multinational group or relies heavily on debt financing. In this blog, we break down the 30% EBITDA cap, its application, and how businesses can prepare and comply effectively.
1. What is the 30% EBITDA Interest Deduction Cap?
The interest deductibility rule restricts the amount of net interest expense that a taxable business can deduct in a tax period to 30% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). The rule aims to prevent companies from using excessive interest deductions to reduce their taxable income in the UAE, especially in related-party or cross-border arrangements.
This cap is applied to the “net interest expense,” which is the amount by which interest expense exceeds interest income. Any disallowed portion above the 30% cap may be carried forward for a set number of years under specific conditions.
2. Who is Affected by This Rule?
The rule applies to UAE businesses that are subject to corporate tax and have significant interest-bearing liabilities. It is particularly relevant to:
- Multinational entities with intercompany loans
- Businesses using debt to finance expansion or acquisitions
- Group entities with centralized treasury operations
- Highly leveraged businesses in sectors such as real estate, infrastructure, or private equity
However, small businesses with net interest expenses below a specific de minimis threshold (e.g., AED 12 million) may be exempt from this rule.
3. Calculating the 30% EBITDA Cap
To determine the amount of interest that can be deducted under this rule, businesses must calculate their adjusted EBITDA for the financial year. The formula typically used is:
EBITDA = Net Profit (as per tax rules) + Interest Expense + Depreciation + Amortization
Once EBITDA is established, 30% of that figure becomes the maximum deductible net interest amount. For instance, if a business has an EBITDA of AED 10 million, the maximum allowable net interest deduction would be AED 3 million.
4. Carry Forward of Disallowed Interest
If a portion of net interest expense exceeds the 30% cap, the excess cannot be deducted in the current tax year. However, the law allows businesses to carry forward the disallowed interest for a number of subsequent years (e.g., up to 10 years), provided the business continues to meet the conditions of deductibility.
It’s essential to maintain clear records and monitor carried forward amounts year by year to ensure compliance and optimization of tax liabilities.
5. Importance of Transfer Pricing and Related Party Transactions
This rule is especially important for businesses engaged in related-party financing arrangements. The UAE Corporate Tax Law mandates adherence to the arm’s length principle under its transfer pricing regulations. Businesses must justify the interest rate, terms, and necessity of such financing arrangements to avoid both TP and EBITDA deductibility issues.
6. Role of PEAK Business Consultancy Services
Analyzing debt levels, calculating EBITDA accurately, and applying the interest limitation rule requires both technical tax knowledge and financial acumen. PEAK Business Consultancy Services provides expert Corporate Tax and VAT advisory services tailored for UAE businesses facing new compliance burdens.
Whether your business needs to structure intra-group financing, assess deductibility limits, or handle transfer pricing documentation, PEAK BCS offers full-spectrum support with strategic insights.
Visit https://www.peakbcs.com/ to explore how PEAK BCS can help you remain compliant and tax-efficient under the UAE’s Corporate Tax regime.
7. Strategic Planning to Optimize Interest Deductions
Companies that anticipate breaching the 30% EBITDA cap can take several proactive steps:
- Review existing debt structures and refinancing options
- Convert part of the debt to equity if feasible
- Shift to less leveraged financing mechanisms
- Ensure proper transfer pricing benchmarks for intercompany loans
Careful planning not only ensures compliance but also allows businesses to manage interest expenses in a way that maximizes tax efficiency over the long term.
8. Impact on Mergers, Acquisitions, and Leveraged Transactions
The interest limitation rule significantly impacts deal structuring in M&A transactions. Acquiring businesses with debt-financed deals must factor in the potential limitation of interest deductions post-acquisition. This may affect valuation models, internal rate of return (IRR), and expected tax shield benefits.
Corporate groups undergoing restructuring or considering leveraged buyouts (LBOs) must integrate these rules early in the planning phase to avoid post-deal compliance issues.
9. Audit Readiness and Documentation Requirements
The Federal Tax Authority (FTA) is likely to scrutinize businesses with large interest deductions. Companies should maintain detailed documentation to support:
- Interest calculations and EBITDA computation
- Arm’s length nature of related-party financing
- Contracts and agreements governing interest-bearing instruments
- Tracking of carry-forward interest across years
Having audit-ready documentation can significantly reduce exposure to penalties and disputes.
10. How PEAK BCS Helps Businesses Stay Ahead
PEAK Business Consultancy Services stands out as a trusted advisor for UAE businesses navigating the complexities of Corporate Tax. Their services include:
- EBITDA and interest deduction assessments
- Transfer pricing compliance and documentation
- Structuring tax-efficient financing arrangements
- Audit support and FTA liaison
Engage with PEAK BCS today to fortify your compliance strategy and enhance your financial decision-making.
Learn more at https://www.peakbcs.com/.
11. Exceptions and Sector-Specific Considerations
Some sectors may be subject to alternative rules or receive transitional relief, especially industries with long-term capital projects (e.g., energy, infrastructure). Additionally, interest on loans used for the acquisition of certain assets may be excluded from the cap if specific conditions are met under Cabinet decisions or Ministerial guidance.
Businesses in these sectors should consult tax advisors to determine if exemptions apply and how to document such positions.
12. Conclusion
The 30% EBITDA cap on interest deductions represents a significant shift in how UAE businesses must manage their debt and tax strategies. While the rule aims to align the UAE with global tax frameworks, it introduces new planning and compliance responsibilities.
Businesses that act early, leverage expert advice, and maintain proper documentation will be better positioned to thrive in this new environment. With guidance from PEAK Business Consultancy Services, companies can navigate the complex interplay of debt structuring, interest deductibility, and tax optimization with confidence.
For expert support tailored to your specific needs, visit https://www.peakbcs.com/ today.
