27-02-2025
How UAE's interest deduction limitation rule is impacting businesses – A need for balanced reform
The Interest Deduction Limitation Rule is a key component of the UAE's tax framework
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.
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