Clarification on Maximum Net Interest Rate Cap for Corporate Tax and About Tax Groups
Businesses in the United Arab Emirates (UAE) always want to know about new tax rules. The Ministry of Finance in the UAE set rules for how companies can deduct interest expenses on their taxes. Let’s break down what this means for you, step by step.
What Is the Maximum Net Interest Deduction Cap?
The UAE made a rule about interest expenses for companies. Companies can only deduct a certain amount as interest each year. The limit is the higher of these two:
- 30% of their adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Or a fixed amount called the “safe harbour,” which is AED 12 million
This rule applies to all companies doing business in the UAE. But it does not apply to banks, insurance firms, or people who do business as individuals. This cap helps the government stop companies from using too much debt to lower their taxes.
If a business has a lot of interest payments, it needs to check its numbers. If the net interest expense goes over the limit, only part of it can be deducted from the company’s income.
Key Points:
- Companies can deduct up to 30% of adjusted EBITDA or AED 12 million (whichever is more).
- Banks, insurance firms, and individuals don’t follow this rule.
- Companies should keep good records for their tax filings.
Are There Any Exemptions to the Rule?
Yes, there are exemptions. If a company borrowed money before December 9, 2022, it can still deduct that interest without following the new cap. Also, companies building big infrastructure projects can be exempt from this limit. The rule gives some relief for old loans and for important projects in the country.
Summary of Exemptions:
- Old loans before the announcement date are exempt.
- Large infrastructure projects can be exempt.
- This helps companies plan for the future with less worry.
How Does This Affect Businesses and Tax Planning?
When the government sets a limit, companies have to plan their money better. If a business borrows too much, it might not get all the tax benefits it wants. So, companies must look at their debts, their interest expenses, and their profits.
Small companies might be okay with the AED 12 million “safe harbour” rule. Bigger companies, though, must check their EBITDA and maybe change their borrowing. Sometimes, businesses even change how they get money, just to stay under the limit.
Tax Planning Tips:
- Check your EBITDA every year.
- Don’t borrow more than you can handle.
- Keep all your loan records ready for the tax office.
What Is a Tax Group in UAE Corporate Tax?
The UAE has a rule for companies that are part of a group. If one company owns at least 95% of another company’s shares and voting rights, they can form a “tax group.” The parent company and the other companies (subsidiaries) can file their tax as one single taxpayer.
Benefits of a Tax Group:
- The group files one tax return instead of many.
- Transactions between group members can be ignored for tax, so there’s no double tax.
- It saves time and makes tax easier for big business families.
To create a tax group:
- The parent company must own at least 95% of each group company.
- Every member must be a UAE tax resident.
- All group companies need to agree and send documents to the Federal Tax Authority (FTA).
Important: Banks and insurers are not included in the EBITDA for a tax group. This keeps the group tax fair for everyone.
Why Should Companies Consider a Tax Group?
Tax groups make things simple for big companies. When a business owns many other companies, it helps to file just one return. This saves time and money. Plus, the companies don’t get taxed twice on their own deals with each other.
But forming a tax group is a big decision. The companies must get professional help, make sure they follow all the steps, and keep their paperwork correct.
How Mubarak Al Ketbi (MAK) Auditing Can Help
Mubarak Al Ketbi (MAK) Auditing can guide your business through all UAE corporate tax rules. Our experts explain the net interest cap and help with forming tax groups. We work with your team to keep you compliant and ready for every new rule. With us, you’ll always have a safety net—because we believe in not leaving any stone unturned when it comes to your tax success!
- For more information, visit our office:
Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates - Or contact/WhatsApp us at +971 50 276 2132
