UAE’s Corporate Tax Law: Managing Your Net Interest Expenditure, Taxable Income

Corporate tax is a direct tax on the net profits businesses and entities earn from their trade. The Federal Tax Authority (FTA) is responsible for the administration, collection and enforcement of this tax.

Implementation and Rates

In January 2022, the Ministry of Finance announced a Federal Corporate Tax (CT) rate of 9% on net business profits, applicable across all emirates. Companies with net profits exceeding Dh375,000 are subject to this tax at the specified rate.

The tax applies to businesses starting from their first financial year commencing on or after 1 June 2023, or January 1, 2024, as mandated by UAE Federal Decree-Law No. 47 of 2022. Companies must prepare their financial statements according to UAE accounting standards.

Purpose and Benefits

The introduction of corporate tax aims to enhance the UAE's status as a leading global hub for trade and investment, promote economic growth, adhere to international tax transparency standards and deter harmful tax practices.

Scope of Application

The corporate tax applies to:

* Individuals conducting business or engaging in commercial activities in the UAE through an unincorporated partnership or sole proprietorship.

* Entities incorporated in the UAE with a commercial licence.

* Foreign entities or individuals with a permanent establishment in the UAE.

Exemptions

According to the UAE government’s official portal, the following are exempt from paying corporate tax:

* Businesses engaged in the extraction of natural resources.

* Profits earned by UAE businesses from their shareholdings.

* Qualifying intra-group transactions and reorganisations.

* Personal earnings such as salary, investment in real estate, shares, securities, etc.

* Income from bank deposits, savings plans, dividends, capital gains, interest, royalties and other investment returns.

* Earnings of foreign investors who do not conduct business in the UAE.

Free Zone Companies

Free zone companies will continue to follow their pre-agreed regulations. However, these rules may change, and if free zone businesses trade with mainland businesses, they must pay corporate tax on that particular income.

Net Interest Expenditure Limitations

The UAE corporate tax law allows net interest expenditure up to 30% of adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) or Dh12 million, whichever is greater. Any remaining net interest expenditure can be carried forward for up to 10 tax periods.

Net Interest Explained

"Net interest" refers to the excess of interest expenses over interest income. When calculating adjusted EBITDA, exempt income is excluded, and any interest related to exempt income is disregarded.

Tax Group Considerations

The net interest expenditure provisions apply to the entire tax group as a single taxable entity. This means the 30% cap and carry forward limits are calculated at the group level.

If the combined net interest expenses exceed Dh12 million and the group’s adjusted EBITDA is insufficient to offset these expenses, the 30% cap is enforced for the entire group.
This applies even if some group members individually have enough EBITDA to cover their interest expenses.

Subsidiary Changes and Group Dissolution

If a subsidiary leaves the tax group or there is a change in the parent company, net interest expenses remain within the group unless they are pre-grouping unutilised expenses of the subsidiary, which the subsidiary will carry forward.

If the group dissolves and the parent company remains taxable, the unutilised net interest expenses stay with the parent company. If the parent company ceases to exist, these expenses remain unutilised unless a new parent company replaces it.

In the case of a merger, the unused net interest expenses are accessible to the new parent company if it becomes the legal successor.

Handling Group Losses and Interest Expenditures

Within a tax group, various loss categories exist, including pre-grouping losses, restricted and unrestricted tax group losses, transferred losses, and those from business restructuring. However, there is no concept of restricted net interest expenditure like restricted tax group losses.

Additionally, a taxable person cannot transfer its net interest expenses to another entity, even in a business restructuring process.

Utilisation of Net Interest Expenditures

Net interest expenditures are offset in the sequence of their occurrence, after adjusting for the current period's net interest expenditures.

If multiple unused net interest expenditures originate from tax periods ending on the same date, there is no requirement to follow chronological order. Pre-grouping net interest expenditures can be utilised up to 30% of the group's adjusted EBITDA or Dh12 million, whichever is higher, provided the subsidiary has sufficient taxable income to offset these expenditures.

Transfer Restrictions

Unlike tax losses, net interest expenditure cannot be transferred between persons or groups under articles 37 and 38 of the law. Any unutilised net interest expenditure tied to a transferor ceases if the transferor exits.

Exemptions

The general interest deduction limitation rule does not affect banks, insurance providers and certain other taxable entities, such as those engaged in qualifying infrastructure projects, or those with loans taken out before December 9, 2022, without changes to the loan terms.

For these entities, their income and expenses are disregarded when calculating the tax group's total net interest expenditure and EBITDA.

Businesses and tax groups must carefully manage their net interest expenses and taxable income to ensure compliance with the UAE corporate tax law. Properly understanding and applying these regulations is crucial for optimising tax obligations and maintaining regulatory compliance.

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