How UAE's interest deduction limitation rule is impacting businesses – A need for balanced reform
The UAE's Interest Deduction Limitation Rule as per Article 30 Federal Decree-Law No. 47 of 2022 on Corporate Taxation aims to enhance fiscal transparency and to maintain adequate capital and not be excessively leveraged. While designed to prevent excessive interest deductions, its implications for capital-intensive industries necessitate a balanced approach.
Understanding the Interest Deduction Limitation Rule
Ministerial Decision no 126 of 2023 limits interest deductions to 30 per cent of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), with an exception allowing up to Dh12 million or 30 per cent of EBITDA, whichever is higher. Any excess interest is non-deductible and added to taxable income, increasing corporate tax liability.
Challenges for UAE Businesses
1. Impact on Capital-Intensive and Commodity Trading Sectors
Industries such as real estate development, manufacturing, and commodity trading (including oil and energy trading) depend heavily on debt financing. As these sectors operate on thin margins, limiting interest deductions could increase tax burdens and affect competitiveness.
2. Increased Tax Burden Due to EBITDA-Based Limitation
While EBITDA is a common financial metric, using it as a deduction benchmark can significantly raise effective tax rates for businesses with substantial financing costs.
Illustrative Example:
This increased tax rate poses financial challenges for debt-reliant industries, potentially discouraging investment.
Global Best Practices and Considerations
Many countries apply sector-sensitive approaches to interest deduction rules. OECD guidelines emphasise proportionality, and several jurisdictions offer exemptions for highly leveraged sectors to maintain investment viability.
Recommendations for Policy Refinement
1. Industry-Specific Adjustments – Relief for commodity traders, infrastructure, and energy sectors to reflect their capital-intensive nature.
2. Increased Deduction Threshold – Raising the cap to 50 per cent of EBITDA to provide greater flexibility for debt-financed businesses.
3. Gradual Implementation – Phased adoption to help businesses transition to new financial structures.
4. Alternative Financial Metrics – Using debt-equity ratios instead of EBITDA-based limitations to ensure fairer taxation.
Conclusion
The Interest Deduction Limitation Rule is a key component of the UAE's tax framework. However, an approach that considers sector-specific financial structures while maintaining fiscal integrity will enhance investment attractiveness. By engaging with businesses and industry experts, policymakers can foster a tax environment that supports long-term economic growth.
Visit: www.kgrnaudit.com/ for expert corporate tax consultation services.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The National
2 days ago
- The National
Opec expects tighter oil market in 2026 amid increased economic momentum
Opec has slightly increased its global oil demand forecast for 2026, expecting a tighter market amid economic momentum that is expected to continue next year. Demand for crude is expected to grow by 100,000 barrels per day to 1.4 million bpd, with a slower expansion in supplies from Opec's rivals, the Vienna-based alliance of oil-producing nations said in its monthly market report for August on Tuesday. Crude demand in the Organisation of Economic Co-operation and Development countries is projected to grow by 200,000 bpd, while non-OECD nations would register a 1.2 million bpd rise, it said. Opec, however, kept its 2025 demand growth view unchanged at 1.3 million bpd. The group also revised its 2025 economic growth forecast higher, to 3 per cent, expecting the "strong momentum" in the first half of 2026 to continue into the later part of the year. Growth estimate this year, however, remained unchanged at 3.1 per cent. Growth in the US, the world's largest economy, was slightly revised upwards to 1.8 per cent for this year and remained at 2.1 per cent in the next. "The global economy continues to follow a stable growth trajectory ... economic data at the start of the second half of 2025 further confirms the resilience of global growth, despite persistent uncertainties related to US-centred trade tensions and broader geopolitical risks," Opec said. It did, however, warn that relations between the US and its partners, strained to various degrees by President Donald Trump's sweeping tariffs, may be a root of trade-related uncertainties that may cause disruption in activity and some inflationary effects. "Nonetheless, a range of fiscal and monetary policy measures is expected to help offset these effects ... the forecast assumes that reasonable trade agreements will be maintained with most key US trading partners, allowing global economic uncertainty to ease further in the coming months," Opec said. Oil markets have remained volatile in a year featuring Mr Trump's tariff plans and the Iran-Israel conflict. Prices started the year strongly. The closing price of Brent, the benchmark for two thirds of the world's oil, peaked at more than $82 a barrel on January 15, while West Texas Intermediate, the gauge that tracks US crude, hit almost $79 per barrel on that day. However, demand concerns, a slowing global economy and less-than-stellar growth in China, the world's largest crude importer, have dampened prices this year. Oil is also under pressure as members of Opec+ alliance of crude producers, led by Saudi Arabia and Russia, continue to boost supply. This month, the group agreed to increase oil production by 547,000 bpd for September as members unwind voluntary cuts introduced during the Covid-19 pandemic. That followed a 548,000 bpd rise in August and 411,000 bpd from May, June and July. However, Opec's report on Tuesday showed the group raised production by 335,000 bpd in July. Oil prices were down on Tuesday at 5.41pm UAE time, with Brent retreating 0.47 per cent to $66.32 a barrel. West Texas Intermediate shed 0.72 per cent to $63.50. Both benchmarks are down more than 11 per cent so far in 2025 against a backdrop of volatile trading.
Zawya
6 days ago
- Zawya
Romania proposes pension reforms as it moves to join OECD
Romanians will be limited to withdrawing a quarter of their private pension funds upon retirement and will receive the rest in monthly payments under a draft reform of the system unveiled on Friday that aims to boost the country's OECD candidacy. The EU member state overhauled its communist-era pension system in 2008, making it compulsory for working Romanians under 35 to contribute to a so-called "second pillar" of private pension schemes in addition to their state pension. Under the scheme, more than 8 million Romanians contribute to seven private pension funds, which have become the largest institutional investors on the Bucharest Stock Exchange. Those funds held assets worth 166.2 billion lei ($38 billion) at the end of May, up 19% on the year, data from Romania's financial supervision authority ASF showed. Romanians are currently allowed to withdraw the entirety of their private pension assets as a lump sum when they reach the retirement age of 65. ASF president Alexandru Petrescu said the draft payments bill released by the government would ensure the stability of the system, giving fund managers more predictability. The payment bill is also a requirement under Romania's accession path to the Organisation for Economic Co-operation and Development. Romania became an OECD accession country in 2022 and hopes to join the club of wealthy nations in early 2026. The OECD will assess Romania's private pension system next month. The draft bill will allow Romanians to choose scheduled withdrawals for up to 10 years or lifelong monthly installments. It will now be submitted for public consultations before approval by the government and a final vote in parliament on its implementation. Romanians will increasingly rely on private pensions, particularly after 2030 when just under 2 million people - a 10th of the population - born under a communist-era abortion ban will reach retirement age, increasing the burden on the pay-as-you-go state pension system. The seven pension funds have so far made payments worth 3.8 billion lei to some 238,000 people but will begin to face larger withdrawals from 2030. ($1 = 4.3554 lei) (Reporting by Luiza Ilie; Editing by Joe Bavier)
Gulf Business
6 days ago
- Gulf Business
Navigating the new tax environment for GCC family offices
Image: Getty Images/ For illustrative purposes As global tax norms tighten and economic diversification becomes a policy priority across the Gulf Cooperation Council (GCC), family offices in the region find themselves at a strategic inflection point. The days of operating in low-disclosure, tax-light environments are gradually giving way to a new era of transparency, regulation, and cross-border compliance. For family offices — guardians of multigenerational wealth and private capital — this shift demands more than passive adaptation; it requires a redefinition of governance, purpose, and geographic footprint. At the same time, the GCC, and particularly the UAE, are well placed to serve as beacons for the relocation of family offices across the globe. As this trend is slowly starting to form, many family offices are exiting from traditional hubs such as the US, UK, Hong Kong and Singapore, and moving to the GCC, with the large majority choosing the UAE as their new hub. Here, we explore the key tax developments affecting GCC family offices and the strategies family offices should adopt to navigate this evolving landscape in a fresh perspective. From low-tax to tax disciplined: A changing fiscal philosophy Historically, GCC family offices thrived in an environment largely insulated from direct taxation. However, the tides have changed, and the current landscape reflects the GCC's broader alignment with OECD frameworks such as the Base Erosion and Profit Shifting (BEPS) initiative and the Common Reporting Standard (CRS). As regional economies mature and look to raise non-oil revenue, tax policy is becoming a tool not just of fiscal necessity but of reputational alignment with global best practices. For family offices, this evolution means that tax neutrality can no longer be assumed — it must be planned for, structured around, and stress-tested regularly. What was once a compliance afterthought is now a strategic priority. At the same time, a sound tax system aligned with the international best practices and the OECD, together with the efforts that most GCC countries have put in place to provide robust structuring options with Common Law-based courts, can be a blessing in disguise to attract family offices from high-tax jurisdictions. New operating mindset and readiness The wave of corporate income tax and substance rules compels GCC-based family offices to examine their entire operating model. The question is no longer just where assets are held, but how and why they are held, and how the services are remunerated. Specifically, most of the GCC's corporate tax regimes include transfer pricing rules. These rules provide a framework to ensure that related parties transact with each other on an arm's length basis. Without these rules, there is a risk that taxpayers could manipulate their transfer pricing to achieve an arbitrary (and unfairly favourable) corporate tax result. The rules are based on global best practices (for example, the OECD Transfer Pricing Guidelines) and put an emphasis on substance and decision making to ensure profit is booked where value is created and key decisions are made. For family offices that have traditionally relied on informal arrangements or layered offshore entities, this creates a direct challenge. Inaction may risk unwarranted tax exposure. For example, services from related parties charged at clearly a non arm's length price, or interest free funding or excessive salaries paid to connected persons. These examples can create significant tax risk and also could require disclosure to the tax authorities under audit. For instance, a common scenario in the UAE is where a family sets up a DIFC/ADGM Foundation, to hold their UAE Family Office (FO) and SPVs for diversified investments, personal real estate and other personal use assets (cars, yachts, jets). Common practice dictates that the family would use the personal real estate and assets without paying rent/lease to the SPV/FO, as well as having their employees support the family with concierge services, and house management without any specific remuneration. However, given the UAE corporate tax and transfer pricing framework, it is critical that these transactions are priced on an arm's length basis. This would require an analysis of the actual conduct of all the parties, choosing the right transfer pricing method and carrying out the appropriate benchmarking. On the flip side, those who act early to align their structures with both domestic and international standards can not only mitigate their tax exposure risk but optimise it as well. Cross-border complexity and global families GCC One area of increasing complexity is the treatment of trust-like structures and foundations, especially when beneficiaries reside in higher-tax jurisdictions like the UK, Canada, the US and European Union countries. These structures may be tax neutral domestically (for example, in the UAE as a family foundation), but its distributions, management structure, and reporting obligations may still trigger tax consequences abroad. Moreover, the second and third generation beneficiaries, who may be less tied to the region, require planning that anticipates life events — relocation, marriage, inheritance — through a globally coordinated tax lens and a strong governance framework. On this point, a key factor to consider is how broad and easy to access is a country's Double Tax Treaty (DTT) network, where for instance within the UAE's tax treaty network there are nationality-based restrictions to claim DTT benefits. Navigating with intention The GCC remains one of the most dynamic and promising regions for private wealth and family offices. Its regulatory evolution reflects the commitment to be aligned with the international best practices and provide a secure platform for individuals and their structures. Nevertheless, despite the positive outlook, this new landscape demands more, particularly on the tax front. If the ultimate goal is to be new global hub for family offices and private wealth, a simple, straightforward, attractive tax bespoke framework for family offices is required, one to rival and surpass key hubs such as Singapore. For family offices in the GCC, and those looking at the GCC as their new home, the question is no longer whether the tax environment is changing — it's how well you're prepared to navigate it. Vishal Sharma is the MD and UAE Tax Practice leader, Malcolm Manekshaw is a senior director, Tax, and Tiago Marques is a manager, Direct and International Tax, Private Clients at
