Ministry of Finance has issued the Ministerial Decision No. 126 of 2023 on the “General Interest Deduction Rule”

The Ministry of Finance issued the Ministerial Decision No. 126 of 2023 on 30 May 2023 in relation to General Interest Deduction Rule in the UAE under the Federal Decree-Law No. 47 of 2022 (’the CT Law’).

The Decision provides for the General Interest Deduction Rule and treatment of Interest expense or income for a certain class of persons.

1. The Decision provides that the interest component in financial returns on Financial Assets and Liabilities shall be considered as interest expenditure or income for the General Interest Deduction Limitation Rule regardless of its classification and treatment under the applicable Accounting Standards. This applies to the interest component on various instruments/ arrangements as under:
   1. Performing and non-performing debt instruments
   2. Collective Investment Schemes
   3. Collateralized asset-backed debt securities
   4. Agreements for the sale and subsequent repurchase of the same security at a future date at an agreed-upon price
   5. Stock lending arrangements
   6. Securitizations and similar transactions
   7. Lease or hire purchase arrangements
   8. Factoring and similar accounts receivable purchase transactions

1. The interest is defined to include –
   1. Guarantee fees, Arrangement fees, Commitment fees, and Other similar charges.
   2. Interest component on forward contracts, futures contracts, and options.
   3. Interest rate and foreign exchange swap agreements or any other financial derivative instruments used for hedging risks.

1. The interest equivalent component on Islamic Financial Instruments shall be treated as interest for the purposes of the General Interest Deduction Limitation Rule. As per Article 1 of the Decision, Islamic Financial Instruments are a financial instrument that is in compliance with Sharia principles and is economically equivalent to any instrument covered under the Financial Assets and Liabilities as per Article 2 of the Decision, or a combination thereof.

1. The finance element of finance and non-finance lease payments accounted for in accordance with the Accounting Standards shall be considered as interest for the purposes of the General Interest Deduction Limitation Rule. This applies to both expenditure incurred and income received in relation to the finance cost element. The total finance element in a lease agreement shall be determined in accordance with the Accounting Standards and in accordance with the accounting policy of the Taxable Person in the year in which the lease was entered into.

1. All foreign exchange gains and losses accruing from Interest shall be considered as interest and shall be subject to General Interest Deduction Limitation Rule.

1. Interest amount which is subject to General Interest Deduction Limitation Rule, is capitalized in accordance with the Accounting Standards, income and expenditure attributable to the capitalized interest amount will also be subject to the General Interest Deduction Limitation Rule.

1. Article 8 of the Decision provides for ‘De Minimis Net Interest Expenditure’ according to which the General Interest Deduction Limitation Rule shall not apply where the Net Interest Expenditure for the relevant Tax Period does not exceed AED 12,000,000 (twelve million dirhams). Hence, in case the Net Interest Expenditure exceeds the threshold of AED 12,000,000, the deduction on account of interest shall be limited to a higher of –
   1. AED 12,000,000 or
   2. 30% of the EBITDA (i.e. accounting earnings before the deduction of interest, tax, depreciation, and amortization) for the relevant tax period.
   In case the relevant Tax Period is more than or less than (12) twelve months, the threshold of AED 12,000,000 shall be adjusted in proportion to the length of the Tax Period.

1. The Decision defines Earnings before the deduction of interest, tax, depreciation, and amortization (EBITDA) shall be the greater of –
   1. AED 0 (zero dirhams) or
   2. Taxable Income is calculated in accordance with Article 20 of the Corporate Tax Law, with the addition of Net Interest Expenditure, Depreciation, and amortization expenditure taken into account in determining the Taxable Income and any Interest income or expenditure relating to historical financial assets or liabilities held prior to 9 December 2022.

There are also certain inclusions/exclusions while calculating EBITDA for the General Interest Deduction Limitation Rule

1. 1. Interest income and Interest expenditure in relation to Qualifying Infrastructure Projects exempted under Article (14) of this Decision shall be excluded.
   2. Any amount of income and expenditures attributable to the interest capitalized in accordance with the Accounting Standards shall be included proportionately in the year of amortization of capitalized interest over the useful life of the related asset, and not when the interest is incurred.

1. The deduction on account of Interest Expenditure under Article 29 of the Corporate Tax Law shall be applied only after the Accounting Income has been adjusted with the number of deductions, relief, unrealized gain/loss, exempt incomes, etc. in accordance with Clause (2) of Article 20 of the Corporate Tax Law.

1. Certain rules for deduction of Net Interest Expenditure in relation to Historical Financial Liabilities. Contracts for debt instruments or other liabilities entered into before or after 9 December 2022 for which terms were agreed prior to 9 December 2022, solely to reduce the interest rate risk on those liabilities shall not be subject to the General Interest Deduction Limitation Rule. This exemption applies only to the Net Interest Expenditure attributable to the relevant debt instruments or other liabilities.Net Interest Expenditure attributable to debt instruments or other liabilities in this case shall be the lower of –
   1. Net Interest Expenditure that arises on the debt instrument or other liability in the Tax Period; or
   2. Net Interest Expenditure that would have arisen on the debt instrument or other liability in the Tax Period in accordance with the terms of the debt instrument or other liability as they stood on 9 December 2022.

1. Article 12 of this Decision provides for special rules to be applied for the treatment of carried forward Net Interest Expenditure in the case of a Tax Group where a new subsidiary joins or leave a Tax Group or upon the cessation of a Tax Group. Net Interest Expenditure and Income of a Bank or Insurance Provider (not subject to the General Interest Deduction Limitation Rule) within a tax group are excluded while calculating the total Net Interest Expenditure and EBITDA of the Tax Group for the purposes of the General Interest Deduction Limitation Rule.

1. Article 13 of this Decision states that the Exempt Persons under paragraphs (a), (b), (c), and (d) of Clause (1) of Article (4) of the Corporate Tax Law shall be subject to the General Interest Deduction Limitation Rule in relation to their independent Business or Business Activity under Articles 5, 6, 7 or 8 of the Corporate Tax Law.

1. As per Article 14 of this Decision, Net Interest Expenditure incurred by a resident Qualifying Infrastructure Project Person in relation to a Qualifying Infrastructure Project shall not be subject to the General Interest Deduction Limitation Rule provided the Qualifying Infrastructure Project Person and the Qualifying Infrastructure Project satisfies the conditions mentioned in the decision.

Key Takeaway

1. The General Interest Deduction Limitation Rule sets out the maximum cap of interest that can be deducted by businesses that are not banks, insurance providers, or natural persons (individuals) undertaking a business or business activity in the UAE.
2. In line with international standards, the net interest expenditure that can be deducted is capped at the higher of 30% of adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) or a safe harbor amount of AED12 million. Tax Groups with members who are banks and/or insurance providers must exclude these members' income and expenditure when determining the 30% EBITDA threshold.
3. In recognition of the importance of infrastructure projects to the country, long-term infrastructure projects meeting relevant conditions will not face restrictions on interest expenditure deductibility under the General Interest Deduction Limitation Rule. Furthermore, in line with the UAE's commitment to maintaining its status as a leading commercial and financing hub, interest incurred on debt instruments entered into before the Law was published to the general public on 9 December 2022 will not be subject to the limitation rule.

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