UAE Interest Limitation Rules: The 30% EBITDA Cap and AED 12M Safe Harbour

UAE interest limitation rules let a business deduct net interest only up to the higher of 30% of adjusted EBITDA or AED 12 million, with the full amount deductible when net interest stays at or below AED 12 million. They govern how much of a company’s net interest expense counts for corporate tax purposes, and they apply to every in-scope UAE taxable person with significant debt financing, not just multinationals.

The governing framework sits in Articles 30 and 31 of Federal Decree-Law No. 47 of 2022, supplemented by Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule. The FTA Corporate Tax Guide CTGIDL1 published in April 2025 sets out how the FTA reads the rules in practice.

The core mechanism is a 30% EBITDA cap on net interest expenditure, with an AED 12 million safe harbour that removes most UAE SMEs from the cap entirely. Interest disallowed under the cap carries forward for up to ten years. A separate specific rule permanently disallows interest on related-party loans used for certain intra-group transactions unless the lender is taxed at 9% or more.

Work this out before your corporate tax return is prepared, not during it. That timing determines whether you deduct your full interest expense or lose a meaningful portion permanently.

What the cap is actually solving for

The framework exists to stop businesses using excessive debt to erode the UAE corporate tax base. Without a cap, groups — multinationals especially — could load up on intercompany loans, manufacture large interest deductions, and shift taxable profit out to lower-tax jurisdictions through the interest leg.

The rules follow the OECD’s BEPS Action 4 recommendations: interest deductibility should reflect actual business profitability, not the size of a financing structure.

The framework operates through two distinct mechanisms applied in sequence. The General Interest Deduction Limitation Rule (GIDLR) under Article 30 caps total net interest deductions at the higher of 30% of tax-adjusted EBITDA or AED 12 million, and disallowed amounts carry forward for up to ten years. The Specific Interest Deduction Limitation Rule (SIDLR) under Article 31 permanently disallows interest on related-party loans used for specific intra-group transactions — dividends, profit distributions, capital reductions, or related-party capital contributions — where a main purpose is obtaining a corporate tax advantage.

The SIDLR is applied first. Any remaining net interest not permanently disallowed under Article 31 is then tested against the GIDLR cap.

The definition of “interest” under Ministerial Decision No. 126 of 2023 is significantly broader than the IFRS definition. It captures loan interest, finance lease components, Islamic finance returns, repo arrangement returns, debt instrument coupons, and amounts incurred in raising finance. Businesses that apply only the IFRS definition understate their net interest expenditure and may over-claim deductions.

Who has to run this calculation

The businesses pulled in

The interest limitation rules apply to all UAE taxable persons with net interest expenditure that crosses the AED 12 million threshold. This includes mainland companies, free zone entities that are not Qualifying Free Zone Persons, and Qualifying Free Zone Persons on their taxable (non-qualifying) income.

Four categories sitting outside the GIDLR

Four categories are exempt from the General Interest Deduction Limitation Rule under Article 30:

• Licensed banks and deposit-taking institutions — interest is integral to their core business model, not a tax-driven mechanism
• Regulated insurance and reinsurance providers — same rationale
• Natural persons conducting business activities — individual business owners subject to corporate tax are not subject to the GIDLR
• Qualifying Infrastructure Projects — projects meeting the conditions in MD 126/2023, Article 14 are exempt from the GIDLR (source: MD 126/2023, Article 14; FTA Guide CTGIDL1, April 2025)

Important: all four exempt categories still face the SIDLR under Article 31 and must meet general deductibility requirements under Article 28. Exemption from the GIDLR is not a full exemption from interest-related limitations.

Running the calculation, end to end

Step 1: Compile net interest expenditure using the MD 126/2023 definition

Total all amounts qualifying as “interest” under Ministerial Decision No. 126 of 2023 — loan interest, finance lease interest components, Islamic finance returns, repo arrangement returns, debt instrument coupons, and financing costs. Subtract total interest income received. The result is net interest expenditure for the period.

Step 2: Screen all related-party loans for SIDLR exposure (Article 31)

Review every related-party loan in the period. If a loan funded a dividend payment, profit distribution, capital reduction, share buyback, or capital contribution to a related party — and if a main purpose was to obtain a corporate tax advantage — the interest on that loan is permanently disallowed unless the related-party lender was subject to corporate tax at 9% or more on that interest income. Remove SIDLR-disallowed amounts from the net interest figure before applying the GIDLR.

Step 3: Test the AED 12 million safe harbour

If net interest expenditure (after SIDLR removal) is AED 12 million or less, the GIDLR cap does not apply. Deduct the full amount. For tax periods shorter or longer than 12 months, adjust the threshold proportionally (a 6-month period: AED 6 million; an 18-month period: AED 18 million).

Step 4: Calculate tax-adjusted EBITDA (if safe harbour is exceeded)

If net interest exceeds AED 12 million, calculate adjusted EBITDA as follows: start with taxable income before the interest cap and tax loss relief; add back net interest expenditure, depreciation, and amortisation; remove exempt income (qualifying dividends, foreign PE income where exempted); apply any historical liabilities election adjustments. This is not accounting EBITDA — the tax adjustments matter.

Step 5: Apply the cap and determine carry-forward

The deductible amount is the higher of AED 12 million or 30% of adjusted EBITDA. Any net interest expenditure above the deductible amount is disallowed for the current period and carried forward for up to ten tax periods.

Step 6: Record the carry-forward balance

Maintain a dedicated carry-forward register tracking the year of disallowance, the amount, and the remaining utilisation window (ten years from the year of disallowance). The carry-forward is applied on a first-in-first-out basis across multiple years.

Thresholds at a glance

[[chart:gidlr-deductible-vs-carryfwd]]

Deadlines you can’t miss

Example: AED 26m interest, AED 60m EBITDA

A UAE subsidiary is funded partly by an intercompany loan from its parent (who is not subject to 9% corporate tax on the interest). In the 2026 tax period:

• Related-party loan interest: AED 4 million (used to fund a dividend — SIDLR applies)
• Remaining net interest expenditure: AED 22 million
• Adjusted EBITDA: AED 60 million

SIDLR (Article 31): The AED 4 million is permanently disallowed. No carry-forward.

GIDLR (Article 30):

• Net interest after SIDLR: AED 22 million — exceeds the AED 12 million safe harbour
• 30% of adjusted EBITDA: 30% × AED 60 million = AED 18 million
• AED 12 million floor vs AED 18 million EBITDA cap → higher is AED 18 million
• Deductible: AED 18 million
• GIDLR carry-forward: AED 22M − AED 18M = AED 4 million (recoverable over the next 10 periods)

Total interest cost in 2026: AED 26M incurred, AED 18M deducted, AED 4M permanently lost (SIDLR), AED 4M carried forward (GIDLR).

This is a common pattern for intra-group financing structures — the SIDLR loss is avoidable with pre-transaction planning; the GIDLR carry-forward is recoverable.

[[chart:worked-example-interest-breakdown]]

Carry-forward — your ten-year window

Interest disallowed solely under the GIDLR is not permanently lost. The carry-forward allows the disallowed amount to be deducted in any of the ten tax periods following the year of disallowance, subject to the GIDLR cap applying in each of those periods.

How carry-forward recovery works in practice:

In a year where a business has lower net interest or higher EBITDA — perhaps after paying down debt or growing revenues — the GIDLR cap may have unused headroom. Prior-year carry-forward balances can be applied against that headroom, recovering deductions that would otherwise be lost.

The ten-year window operates on a first-in-first-out basis. Carry-forward from 2026 is utilised before carry-forward from 2027. A dedicated tracking register is essential — without it, businesses lose visibility of which balances expire first.

Carry-forward balances that remain unused after ten periods expire permanently. Businesses with sustained high leverage relative to EBITDA should model multi-year utilisation to identify when a capital structure change (debt reduction, equity injection) prevents expiry.

Related-party loans: the SIDLR trap

The SIDLR is the higher-stakes provision for businesses with intra-group financing. Unlike the GIDLR, its disallowance is permanent — there is no carry-forward, no recovery mechanism.

SIDLR disallows interest paid to a related party where:

1. The loan proceeds were used to fund a dividend payment, profit distribution, capital reduction, share buyback, or capital contribution to a related party; and
2. A main purpose of the transaction was to obtain a corporate tax advantage

There is one exception worth knowing well. If the related-party lender is subject to corporate tax at 9% or more on the interest income received, in its jurisdiction of tax residence, SIDLR doesn’t apply. UAE-to-UAE related-party loans where the lender is a standard-rate UAE taxable person typically pass this test.

Genuine commercial loans for operating purposes — working capital, arm’s-length acquisition finance, real asset purchases — are generally outside SIDLR scope. The risk concentrates in dividend-funding loan structures where the lender is in a low- or zero-tax jurisdiction.

SIDLR disallowance is applied before the GIDLR and is generally permanent. Structuring a related-party loan to fund a dividend without confirming the lender is taxed at 9%+ can permanently destroy the full interest deduction for that loan — it does not carry forward. Pre-transaction SIDLR screening is far cheaper than post-filing remediation.

If your debt predates 9 December 2022

Debt instruments whose commercial terms were agreed before 9 December 2022 — the date Federal Decree-Law No. 47 of 2022 was issued — can be exempted from the GIDLR through an election on the corporate tax return.

The exemption recognises that businesses financing themselves before UAE corporate tax was introduced could not have anticipated the interest limitation rules when structuring their debt.

Key conditions:

• Terms of the debt instrument or liability must have been agreed before 9 December 2022
• Material modifications after that date can disqualify the instrument
• Full refinancing into a new instrument terminates historical liability status (the new instrument is post-2022)
• The election must be made on the corporate tax return and supported by documentation evidencing the original terms

There’s a ceiling on it, though. Exempt interest is limited to the amount that would have arisen under the original pre-9 December 2022 terms, so post-2022 contractual changes that increased the interest amount can’t be used to inflate the exemption.

Businesses with significant pre-2022 bank debt or long-term facility agreements should run the calculation both ways each year — the historical liabilities election is not always the better outcome depending on the EBITDA position.

Filing as a tax group changes the math

For entities filing as a UAE Tax Group, the GIDLR is calculated at the consolidated group level. The group’s total net interest expenditure is tested against the group’s consolidated adjusted EBITDA cap.

Group-level calculation often produces better outcomes than entity-level analysis because profitable members contribute EBITDA capacity that supports deductions for highly-leveraged members within the same group.

Key mechanics for joining and leaving:

For Tax Groups containing banks or insurance providers, those members’ income and expenses are excluded from the group EBITDA calculation. Their GIDLR exemption does not inflate the cap available to the other group members.

Where SMEs keep tripping up

The one we see most often is leaning on the IFRS interest definition. The MD 126/2023 definition is broader — finance lease components, Islamic finance returns, and fundraising costs count as interest under the UAE rules but may not under IFRS — and understating net interest here creates FTA challenge exposure.

Assuming the safe harbour applies without actually calculating is another. The AED 12 million safe harbour only applies when net interest is at or below AED 12 million, so businesses with borderline positions should work out net interest carefully rather than assume they’re below the line.

Adjusted EBITDA gets miscalculated too. It starts from taxable income, not accounting profit, before the interest cap and tax loss relief, and exempt income has to come out. Use accounting EBITDA without these adjustments and you get an inflated cap figure and overstated deductions.

Plenty of businesses focus entirely on the 30% GIDLR cap and miss the SIDLR completely. Related-party loans funding dividends, capital reductions, or share buybacks face permanent disallowance unless the 9% lender exception applies, so SIDLR screening needs to happen before any such transaction closes.

Losing track of carry-forward balances hurts as well. Disallowed GIDLR interest carries forward for ten years, but only if it’s tracked year by year — lose the register and you miss recovery opportunities when EBITDA improves. Keeping it inside your regular bookkeeping and accounting records is the simplest fix.

And businesses with significant pre-2022 debt that forget the historical liabilities election forgo a potentially substantial relief. That analysis belongs in every annual corporate tax services engagement where legacy debt exists.

How transfer pricing collides with this

Article 30 and Article 31 do not operate in isolation. Both sit alongside the UAE transfer pricing regime under Articles 34 and 35, which requires related-party transactions — including intercompany loans — to be priced at arm’s length. The result is a two-stage test on related-party interest: first the price (the interest rate), then the deductibility (the GIDLR and SIDLR).

The first stage is arm’s-length pricing. A related-party loan at an above-market interest rate has the excess portion adjusted out under Article 34 before any interest cap applies, benchmarked against the rate an unrelated lender would charge for a comparable loan to a comparable borrower and evidenced by a contemporaneous transfer pricing analysis.

The second stage is deductibility. That arm’s-length interest figure then flows into the SIDLR screen and the GIDLR cap. A loan priced at arm’s length that still funds a dividend with a low-tax related lender still fails the SIDLR test — pricing alone doesn’t cure the deductibility problem.

The practical consequence is that pre-transaction analysis for any material intra-group loan must cover both stages. Groups that prepare transfer pricing documentation without testing the SIDLR conditions discover the permanent disallowance only when the corporate tax return is reviewed.

For larger groups, the same analysis should be cross-checked against the Country-by-Country Reporting data — material UAE interest expense to a low-tax jurisdiction is one of the FTA’s standard risk-selection signals for transfer pricing audit.

What we see by sector

Different sectors produce different interest-limitation profiles, and the Dubai EBITDA corporate tax implications for business operations vary sharply with how each one is financed. Knowing where your business sits in the pattern accelerates the planning conversation.

Take the Dubai developer running a five-project pipeline. These groups often run the highest gross debt-to-EBITDA ratios in the UAE economy — bank facilities tied to specific project cycles, off-plan receivable financing, and acquisition leverage routinely push net interest above the AED 12 million safe harbour. Adjusted EBITDA can also swing hard across project handover years, giving wide year-on-year variation in the cap, so multi-year carry-forward modelling is essential. These are the groups that most benefit from rolling the carry-forward register forward over a full project cycle rather than year by year.

A trading group growing through acquisitions looks different. Working-capital lines and receivable financing dominate, and most stay comfortably inside the safe harbour, but grow through acquisition and you can cross the threshold quickly. Here the SIDLR risk concentrates on acquisition-finance loans from related parties, particularly where a UAE acquirer is funded by a parent in a low-tax jurisdiction.

The family office paying a shareholder dividend is the classic SIDLR exposure pattern. A holding company borrows from a shareholder (often through an offshore vehicle), pays a dividend up the chain, and the interest is permanently disallowed because the lender isn’t subject to 9% corporate tax. The 9% lender exception is the screen that matters most — confirm it before the loan is documented, not after the dividend is declared.

A DIFC consultancy with a partner buy-in sits almost always inside the safe harbour, so the interest rules rarely matter on their own. The one moment they do is a partner-financed transition — a buy-in, a partner exit, a restructuring — which can throw up a one-off interest deduction question worth checking against the AED 12 million threshold.

The free-zone QFZP with mixed-stream income is a special case. A QFZP claiming the 0% rate on qualifying income still applies the interest rules to its non-qualifying (9%-taxed) income stream. Interest expense has to be allocated between the streams on a reasonable basis, and the cap applies only to the non-qualifying portion. Document that allocation methodology before the return is filed, because ad hoc allocations are an audit trigger.

Build a three-year rolling plan instead of scrambling at filing time

Businesses with net interest above the safe harbour benefit from a structured three-year planning cycle rather than a single-period view. The framework we use with clients runs roughly like this.

Year one establishes the baseline. Compute net interest using the MD 126/2023 definition, calculate tax-adjusted EBITDA, apply the cap, and document the carry-forward balance. Open a carry-forward register that captures the period of origination, the disallowed amount, and the ten-year expiry date.

Year two is about modelling recovery. Project net interest, EBITDA, and the cap for the upcoming period. Where the cap has projected headroom, work out which prior-year carry-forward balances are recoverable; where it stays tight, weigh whether capital structure changes — refinancing, equity injection, debt reduction — restore headroom over the medium term before anything expires.

By year three the analysis should be feeding strategic decisions rather than just following them. Acquisition financing structures, dividend timing, intra-group loan repricing, and free zone elections all interact with the GIDLR and SIDLR, so the annual planning conversation should pre-test material decisions against the cap before they close. That’s exactly the kind of work CFO advisory support folds into the wider finance plan.

Businesses that operate on this cycle preserve carry-forward value, avoid SIDLR surprises, and present a clean position when the FTA reviews the interest deduction calculation. Businesses that compute the cap once a year, at filing time, regularly lose deductions that strategic timing would have preserved.

Two regimes the interest cap now talks to

Since the start of 2025, the GIDLR stopped being a self-contained computation and became one input in a wider system. Two interactions are worth checking in any mid-2026 review.

Pillar Two groups: disallowance moves the ETR. For UAE entities inside multinational groups above the EUR 750 million threshold, interest disallowed under the GIDLR increases taxable income and covered taxes — which lifts the jurisdictional effective tax rate used for the UAE domestic minimum top-up tax. The odd result: a “bad” GIDLR outcome at the 9% layer can reduce or eliminate a 15% top-up. In-scope groups should model the two layers together rather than treating a disallowance purely as a cost.

Cross-border loans: the deduction is only half the file. Intercompany interest paid to a foreign lender raises three questions at once — is the rate arm’s length, does the GIDLR allow the deduction, and what does the lender’s jurisdiction withhold or tax on receipt? The third leg runs through treaty positions and residency certificates, covered in our withholding tax UAE guide. Files that answer all three coherently close reviews quickly; files where the loan agreement, TP memo and treaty claim were prepared by different advisers at different times tend not to.

And one relief-side note for smaller entities inside larger structures: a company validly electing small business relief isn’t computing taxable income during the relief period, so interest-cap mechanics are effectively parked — but net interest doesn’t vanish. When the relief ends or revenue crosses the threshold, the full GIDLR computation resumes, and carry-forward positions need a clean starting point. Keep the interest schedules current even in relief years.

Where this leaves you

For most Dubai SMEs, the practical answer is straightforward: if your annual net interest expense is under AED 12 million, the GIDLR cap does not affect you at all. You deduct your full net interest, file your corporate tax return, and move on.

The rules become material in three common situations. Highly leveraged businesses come first — real estate developers, construction companies, or anyone with significant bank financing above the AED 12 million threshold needs the full GIDLR calculation and carry-forward tracking built into the annual compliance process. Then there’s intra-group financing: any structure where a shareholder, parent, or related entity has lent money to the UAE company needs SIDLR screening before a dividend or distribution is declared, because the permanent disallowance risk is avoidable with pre-transaction advice but can’t be reversed after the fact. And businesses with pre-2022 debt — existing loan facilities, long-term bonds, or bilateral facilities agreed before 9 December 2022 — should test the historical liabilities exemption election annually, since it can beat the standard GIDLR calculation in years when the 30% EBITDA cap would otherwise bite.

If you are in any of these categories, the time to model your interest position is before your corporate tax return is prepared, not during it. The FTA audit readiness implications of incorrect interest deduction claims — particularly SIDLR-disallowed amounts claimed as deductions — are significant. See also our guidance on UAE corporate tax penalties for the exposure associated with incorrect deductions.

For businesses operating across free zones or managing transfer pricing on intra-group loans, the interaction between the interest limitation rules and those regimes adds further complexity that warrants specialist review.

For UAE accounting, VAT and corporate tax support, see Velmont Crest, a Dubai accounting firm.

References:

1. UAE Federal Tax Authority — Corporate Tax Guide CTGIDL1, Ministerial Decision No. 126 of 2023, and EmaraTax filing procedures
2. UAE Ministry of Finance — Federal Decree-Law No. 47 of 2022, Articles 30 and 31
3. UAE Government Portal — UAE corporate tax overview and official business guidance