Is interest income taxed under Corporate Tax?
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Yes. Interest income you earn is normally included in your taxable profit for Corporate Tax purposes, unless it falls under a specific exemption such as the participation exemption for qualifying shareholdings.
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The detail
Interest income is generally taxable and forms part of a Taxable Person's Taxable Income. It is also relevant under Article 30 of the Corporate Tax Law, where taxable interest income is netted against interest expenditure to determine Net Interest Expenditure for the interest deduction limitation. Interest income does not benefit from the participation exemption unless it is received by the Taxable Person in its capacity as owner of an ownership interest in a qualifying Participation, which is uncommon for ordinary loan interest.123
What the law says
- Under Article 30(2) of the Corporate Tax Law, Net Interest Expenditure is the amount by which interest expenditure exceeds taxable interest income for the Tax Period.2
- Under Article 12 of Ministerial Decision No. 302 of 2024 (and the equivalent Article 11 of Ministerial Decision No. 116 of 2023), only income received by a Taxable Person in its capacity as owner of an ownership interest in a Participation is exempt; income received in any other capacity, including ordinary interest, is not exempt.13
What it depends on
- If interest is instead treated as a distribution from a qualifying Participation (e.g. certain fund distributions), it may be re-characterised as Exempt Income or as Interest income depending on its source, per FTA guidance on investment funds.4 Based on FTA guidance
- Interest expenditure and income calculations for the 30% EBITDA limitation under Article 30 may also be affected by the Specific Interest Deduction Limitation Rule where the main purpose is to gain a Corporate Tax advantage.5 Based on FTA guidance
Check before you rely on it
- Confirm whether the interest arises from an ordinary loan or from an ownership interest in a qualifying Participation
- Check if you are a Bank, Insurance Provider, or natural person, as these are excluded from the interest limitation rule
Sources (5) — read the official text
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Article 12 – Income from Ownership Interests in a Participation
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Article 12 – Income from Ownership Interests in a Participation 1. Income provided for in Clause (5) of Article (23) of the Corporate Tax Law that is derived from a Participation shall be exempt insofar it is received by a Taxable Person in his capacity as owner of an ownership interest or ownership interests in the Participation. 2. Income derived in any other capacity than that mentioned in Clause (1) of this Article and income derived in relation to, but not directly from, an ownership Ministerial Decision No. 302 of 2024 – As published by the Ministry of Finance 10 interest in a Participation shall not be exempt from Corporate Tax.
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Article 30 – General Interest Deduction Limitation Rule
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Article 30 – General Interest Deduction Limitation Rule 1. A Taxable Person’s Net Interest Expenditure shall be deductible up to 30% (thirty percent) of the Taxable Person’s accounting earnings before the deduction of interest, tax, depreciation and amortisation (EBITDA) for the relevant Tax Period, excluding any Exempt Income under Article 22 of this Decree-Law. 2. A Taxable Person’s Net Interest Expenditure for a Tax Period is the amount by which the Interest expenditure incurred during the Tax Period, including the amount of any Net Interest Expenditure carried forward under Clause 4 of this Article, exceeds the taxable Interest income derived during that same period. 3. The limitation under Clause 1 of this Article shall not apply where the Net Interest Expenditure of the Taxable Person for the relevant Tax Period does not exceed an amount specified by the Minister. 4. The amount of Net Interest Expenditure disallowed under Clause 1 of this Article may be carried forward and deducted in the subsequent (10) ten Tax Periods in the order in which the amount was incurred, subject to Clauses 1 and 2 of this Article. 5. Interest expenditure disallowed under any other provision of this Decree-Law shall be excluded from the calculation of Net Interest Expenditure under Clause 2 of this Article. 6. Clauses 1 to 5 of this Article shall not apply to the following Persons: a. A Bank. b. An Insurance Provider. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 37 c. A natural person undertaking a Business or Business Activity in the State. d. Any other Person as may be determined by the Minister. 7. The Minister may issue a decision to specify the application of Clauses 1 and 2 of this Article to a Taxable Person that is related to one or more Persons through ownership or control and there is an obligation on them under applicable accounting standards for their financial statements to be consolidated.
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Article 11 – Income from Ownership Interests in a Participation
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Article 11 – Income from Ownership Interests in a Participation 1. Income provided for in Clause 5 of Article 23 of the Corporate Tax Law that is derived from a Participation shall be exempt insofar it is received by a Taxable Person in his capacity as owner of an ownership interest or ownership interests in the Participation. 2. Income derived in any other capacity than that mentioned in Clause 1 of this Article and income derived in relation to, but not directly from, an ownership Ministerial Decision No. 116 of 2023 – As published by Ministry of Finance 9 interest in a Participation shall not be exempt from Corporate Tax.
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Other income Any net income available for distribution that is not categorised as Exempt Income, Interest income or income from Immovable Property in the UAE, should be allocated to other income. 4.4.2.2. At the investor level Any investor in a Qualifying Investment Fund that is a Taxable Person shall include in their income their proportional share of the amount reflected as net income available for distribution in the financial statements of the Qualifying Investment Fund. To the extent the net income relates to net Exempt Income, this should also be treated as Exempt Income for the investor that is a Taxable Person. Any proportional amount of net Interest income shall be treated as Interest income for any investor that is a Taxable Person. Under Article 30(1) of the Corporate Tax Law, a Taxable Person’s Net Interest Expenditure shall be deductible up to 30% of the Taxable Person’s adjusted accounting earnings before the deduction of Interest, tax, depreciation and amortisation, or AED 12 million, whichever is higher. 40 Net Interest Expenditure is determined as the amount by which Interest expenditure exceeds the taxable Interest income.41 If the net income of a Qualifying Investment Fund includes net Interest income, a proportional part of the income included shall be treated as Interest income for the Taxable Person who is an investor for the purposes of Article 30 of the Corporate Tax Law. Interest income would reduce the Net Interest Expenditure of the investor. The net income from Immovable Property in the UAE can create a nexus for an investor that is a Non-Resident juridical person, as explained above.42 All other income shall be included in the Taxable Income of the investor where relevant. Furthermore, where an investor that is a Taxable Person realises a capital gain on the disposal of their ownership interest in a Qualifying Investment Fund, the resulting gain 40 Article 30 of the Corporate Tax Law read with Ministerial Decision No. 126 of 2023. 41 Article 30(2) of the Corporate Tax Law. 42 Article 2 of Cabinet Decision No. 56 of 2023. Corporate Tax Guide | Investment Funds and Investment Managers | CTGIFM1 26
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Company S takes out a loan of AED 30 million at an arm’s length annual interest rate of 6% from Company T. It plans to use the funds to pay a dividend to its shareholders, Company T and Company U. Since the interest income of AED 1.8 million that Company T receives from Company S is not subject to any tax in Country T, Company S needs to assess whether the main purpose of obtaining the loan and paying the dividend is to gain a Corporate Tax advantage. If Company S cannot demonstrate that it is not to gain a Corporate Tax advantage, then the AED 1.8 million of Interest expenditure is disallowed under the Specific Interest Deduction Limitation Rule when Company S calculates its Taxable Income. If Company S can demonstrate that there is no main purpose of gaining a Corporate Tax, Company S will then need to bring in the Interest expenditure when applying the General Interest Deduction Limitation Rule. Corporate Tax Guide | Interest Deduction Limitation Rules | CTGIDL1 44
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Written by AI from the FTA sources above and checked before display. Not tax advice or official FTA information - confirm with a tax adviser before you act. Full disclaimer
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