Is interest expense deductible for Corporate Tax?

Article 11 – Expenditure in Relation to the Acquisition and Disposal of a Participating Interest 1. Expenditure incurred in relation to the acquisition, sale, transfer, or disposal of an entire Participating Interest or part of a Participating Interest shall not be deductible in accordance with Article (22) and paragraph (b) of Clause (2) of Article (28) of the Corporate Tax Law. 2. Expenditure referred to in Clause (1) of this Article shall include, but not be limited to, any of the following: a. Professional fees. b. Due diligence costs. c. Litigation costs. d. Commissions and brokerage fees. e. Stamp duty, registration duties and other irrecoverable taxes. f. Appraisal and valuation costs. g. Refinancing costs. 3. Interest expenditure incurred in relation to the acquisition and subsequent holding of a Participating Interest shall be deductible subject to Chapter Nine of the Corporate Tax Law. 4. The expenditure as specified in Clause (1) of this Article shall be capitalised as part of the acquisition cost of the Participating Interest.

Article 29 – Interest Expenditure Notwithstanding paragraph (b) of Clause 2 of Article 28 of this Decree-Law, Interest expenditure shall be deductible in the Tax Period in which it is incurred, subject to the other provisions of Article 28 and Articles 30 and 31 of this Decree-Law.

Article 8 – De Minimis Net Interest Expenditure 1. The limitation on the deductible Net Interest Expenditure provided under Clause (1) of Article (30) of the Corporate Tax Law shall not apply where the Net Interest Expenditure for the relevant Tax Period does not exceed AED 12,000,000 (twelve million dirhams). Ministerial Decision No. 126 of 2023 – As published by Ministry of Finance 4 2. Where the Net Interest Expenditure exceeds the amount referred to in Clause (1) of this Article, a Taxable Person may deduct the higher of AED 12,000,000 (twelve million dirhams) or the percentage provided for under Clause (1) of Article 30 of the Corporate Tax Law. 3. For purposes of this Article, where the relevant Tax Period is more than or less than (12) twelve months, the amount stated in Clause (1) of this Article shall be adjusted in proportion to the length of the Tax Period.

Assuming the EBITDA (earnings before the deduction of Interest, tax, depreciation and amortisation) of Mr. S is AED 30 million and the incurred Interest expenses related to this activity for the same calendar year amount to AED 15 million. The Interest expense is more than 30% of EBITDA (AED 30 million x 30% = AED 9 million) as well as the de minimis of AED 12 million. However, the Interest expense is fully deductible as the General Interest Deduction Limitation Rule does not apply to natural persons. 4.2. General deduction rules relating to Business expenditure Expenditure incurred by a natural person wholly and exclusively for the purposes of his or her Business that is not capital in nature shall be deductible in the Tax Period in which it is incurred. This general rule is subject to certain limitations. Accordingly, no deduction is allowed in relation to the following:24 a. Expenditure not incurred for the purposes of the natural person’s Business. b. Expenditure incurred in deriving Exempt Income (other than Interest expenditure). c. Losses not connected with or arising out of the natural person’s Business. If expenditure is incurred for more than one purpose, a deduction would be allowed for any identifiable part or proportion of the expenditure incurred wholly and exclusively for the purposes of deriving Taxable Income, or if not incurred wholly and exclusively for the purposes of Business, an appropriate proportion of any unidentifiable part or proportion of the expenditure incurred for the purposes of deriving Taxable Income that has been determined on a fair and reasonable basis, having regard to the relevant facts and circumstances of the natural person’s Business. 4.3. Non-deductible expenditure rules and natural persons Article 33 of the Corporate Tax Law disallows deductions for certain types of expenditure. This includes a specific disallowance for amounts withdrawn from a Business by a natural person.25 For example, amounts withdrawn by a natural person from their sole proprietorship Business – even if described as Wage or salary – cannot be deducted in calculating the Taxable Income arising from that Business. 24 Article 28 of the Corporate Tax Law. 25 Article 33(5) of the Corporate Tax Law. Corporate Tax Guide | Taxation of natural persons under the Corporate Tax Law | CTGTNP1 29