With the introduction of UAE Corporate Tax under Federal Decree-Law No. 47 of 2022, interest expense is no longer automatically deductible. To prevent excessive debt-based tax planning and align with international BEPS standards, the UAE implemented the Interest Deduction Limitation Rules (IDLR) framework, supported by Ministerial Decision No. 126 of 2023 (General Interest Deduction Limitation Rule) and the FTA Guide on Interest Deduction Limitation Rules (CTGIDL1).

These rules now operate as mandatory limitations that override general deductibility, even if interest is otherwise wholly and exclusively incurred.

For UAE businesses with loans, Islamic finance facilities, leasing, bonds, or shareholder financing, these rules have a direct financial impact, affecting cash tax costs, funding structures, and investment decisions.

Why Interest Deduction Limitation Rules Matter?

With the introduction of UAE Corporate Tax under Federal Decree-Law No. 47 of 2022, interest expense is no longer a “free” deduction. The UAE has implemented Interest Deduction Limitation Rules (IDLR) to prevent excessive debt funding from being used to erode the tax base and to align with global BEPS standards.

CTGIDL1 specifically highlights that the purpose of IDLR is to restrict “debt-pushdown” structures and artificial leverage commonly seen in M&A transactions and group reorganisations.

For many UAE businesses—especially those with bank borrowings, intra-group loans, leasing, or project finance—IDLR will directly affect how much interest is deductible each year and how to model financing structures going forward.

This article summarises the rules based on:

• Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule (GIDLR)
• The FTA Corporate Tax Guide: Interest Deduction Limitation Rules (CTGIDL1), issued in April 2025.

The guidance clarifies computational steps, gives binding interpretations, and resolves ambiguities left open in MD 126.

Legal framework – where do the rules sit?

The UAE IDLR framework is built from several layers:

1. Corporate Tax Law

1. • Article 29 – General rules on deductibility of expenditure.
   • Article 30 – General Interest Deduction Limitation Rule (GIDLR).
   • Article 31 – Specific Interest Deduction Limitation Rule (SIDLR) for certain related-party loans.

Articles 30 and 31 take priority over general deductibility and transfer pricing once triggered.

2. Ministerial Decision No. 126 of 2023

1. • Clarifies the definition of “Interest”,
   • Prescribes the AED 12 million de minimis threshold,
   • Sets out Adjusted EBITDA, carry-forward and special reliefs (historical liabilities, infrastructure projects, tax groups, etc.).

MD 126 provides the operative formulas and is the legal backbone of IDLR calculation.

3. FTA Guide CTGIDL1 (April 2025)

1. • Explains the meaning of Interest,
   • How to compute Net Interest Expenditure (NIE) and Adjusted EBITDA,
   • How GIDLR and SIDLR interact, and
   • Practical examples and clarifications.

CTGIDL1 confirms that taxpayers must apply SIDLR before applying GIDLR in this order is mandatory.

The Four-Step Hierarchy for Deducting Interest

The FTA guide confirms a four-step hierarchy for testing interest deductions:

1. General deductibility rules – interest must be:

• • incurred wholly and exclusively for the business, and
  • not capital in nature (unless specifically allowed).

CTGIDL1 stresses that improper documentation automatically pushes interest into “non-deductible” before IDLR even applies.

2. Arm’s length principle – particularly for Related Parties or Connected Persons, interest must be at market value / arm’s length. Any non-arm’s-length excess is disallowed first.

Any transfer-pricing adjustment reduces NIE before computing GIDLR.

3. Specific Interest Deduction Limitation Rule (SIDLR) – may completely disallow interest on certain related-party loans (e.g. loans used to fund dividends or equity acquisitions).

4. General Interest Deduction Limitation Rule (GIDLR) – caps the remaining Net Interest Expenditure to the higher of:

• • AED 12 million, or
  • 30% of Adjusted EBITDA,
    subject to carry-forward rules.

This order is legally enforced. A taxpayer cannot skip to GIDLR if SIDLR is triggered.

What Counts as “Interest”?

“Interest” is wider than just bank loan interest. Under the Corporate Tax Law and MD 126 it includes:

• Amounts paid or accrued for the use of money or credit
• Discounts and premiums on financial instruments
• Profit under Islamic financial instruments
• Other payments are economically equivalent to interest
• The finance element of finance and non-finance lease payments
• Foreign exchange gains and losses relating to interest
• Capitalised interest – where interest is added to the cost of an asset

CTGIDL1 clarifies that lease interest under IFRS 16 is always included, even if presented within operating expenses.
Additionally, interest embedded in supplier credit or deferred payment arrangements may also fall under IDLR if financing is implicit.

In practice, this means IDLR can affect:

• Bank loans/overdrafts
• Shareholder and group loans
• Bonds and Sukuk
• Lease liabilities under IFRS 16 (finance charges)
• Certain derivatives and hedging arrangements if they have an interest-like financing component

FTA emphasises substance over form; renaming interest as “profit share”, “service fee”, or “financing margin” does not avoid IDLR.

Key concept: Net Interest Expenditure (NIE)

Net Interest Expenditure (NIE) is the central concept for GIDLR.

NIE = Total Interest expenditure (including carried-forward disallowed NIE)
minus
Total Interest Income for the Tax Period

Certain items are excluded from NIE for GIDLR purposes, such as:

• Interest already disallowed under other Corporate Tax provisions (e.g., non-business, capital in nature, non-arm’s-length),
• NIE related to grandfathered historical liabilities (pre-9 December 2022) that meet MD 126 conditions, and
• NIE connected to Qualifying Infrastructure Projects (QIP).

CTGIDL1 makes it clear that interest income cannot be “reclassified” to reduce NIE unless its character is genuinely interest in nature.

General Interest Deduction Limitation Rule (GIDLR)

1. Basic rule

Under Article 30 and MD 126.

The de minimis threshold is absolute; once NIE exceeds AED 12m, the full 30% EBITDA test applies.

The AED 12m threshold must be pro-rated for short or long tax periods—this is directly stated in MD 126.

Below summarised:

1. If NIE ≤ AED 12 million (de minimis safe harbour):
   → GIDLR does not apply. NIE is fully deductible (subject to the other rules).
2. If NIE > AED 12 million:
   → Deductible NIE = the higher of:
   • AED 12 million, or
   • 30% of Adjusted EBITDA (for that Tax Period),

but not more than the actual NIE. Any excess is disallowed and may be carried forward. The AED 12 million threshold must be pro-rated where the Tax Period is more or less than 12 months.

2. Adjusted EBITDA – how to calculate

Adjusted EBITDA starts from Taxable Income and adds back specific items under MD 126.

Unlike accounting EBITDA, Adjusted EBITDA is purely tax-driven and must follow the formula in MD 126.

If Adjusted EBITDA is negative, GIDLR treats it as zero.

Adjusted EBITDA for GIDLR purposes should be arrived by adding:

• Net Interest Expenditure for the period;
• Depreciation and amortisation that was deducted in computing that Taxable Income;
• NIE related to historical financial liabilities; and
• NIE related to Qualifying Infrastructure Projects.

If the resulting Adjusted EBITDA is negative, it is treated as zero for GIDLR.

3. Example – applying GIDLR

Assume a UAE company (not a bank/insurer) has for the 2025 Tax Period:

• Taxable Income (before GIDLR) = AED 40 million
• Net Interest Expenditure (NIE) = AED 30 million
• Depreciation & amortisation deducted = AED 10 million
• No historical liabilities or QIP interest

Step 1 – Adjusted EBITDA

• Start with Taxable Income: 40m
• Add NIE: +30m → 70m
• Add D&A: +10m → Adjusted EBITDA = 80m

Step 2 – 30% cap

• 30% of 80m = 0.30 × 80m = AED 24 million

Step 3 – De minimis

• De minimis threshold = AED 12 million

Step 4 – Deductible NIE

• Higher of AED 12m and AED 24m = AED 24m
• Actual NIE is 30m → 24m deductible; 6m disallowed under GIDLR

Step 5 – Carry-forward

• Disallowed NIE of AED 6m can be carried forward to future periods (see next section).

CTGIDL1 confirms this method and the necessity of adding back D&A and NIE fully, even if partially disallowed.

4. Carry-forward of disallowed NIE

Any NIE disallowed by GIDLR in a Tax Period:

• can be carried forward for up to 10 subsequent Tax Periods,
• must be used on a first-in, first-out (FIFO) basis, and
• cannot be transferred to another Taxable Person outside a Tax Group.

MD 126 states that carried-forward NIE cannot create or increase a tax loss—this is an important compliance point businesses often miss.

If a Taxable Person deregisters (e.g., a foreign PE ceases), any unutilised carried-forward NIE is normally forfeited.

Where a Subsidiary joins a Tax Group, its carried-forward NIE can only be used against the portion of the Tax Group’s Taxable Income attributable to that Subsidiary.

Specific Interest Deduction Limitation Rule (SIDLR)

SIDLR is a targeted anti-avoidance rule under Article 31 that can fully disallow interest on certain Related Party loans, irrespective of the 30% EBITDA cap.

Interest on a loan from a Related Party is not deductible if the loan is used (directly or indirectly) to:

• pay a dividend or profit distribution to a Related Party;
• redeem, repurchase, reduce or return share capital to a Related Party;
• make a capital contribution to a Related Party; or
• acquire ownership interest in a Person who is (or becomes) a Related Party.

CTGIDL1 adds that “indirect use of funds” is enough to trigger SIDLR, even if the loan proceeds are routed through intermediaries.

However, SIDLR does not apply if the Taxable Person can demonstrate that obtaining the loan and carrying out the transaction was not mainly to obtain a Corporate Tax advantage (the main-purpose test).

In addition, where the lender is in a jurisdiction that effectively taxes the interest income at ≥ 9% (after transfer-pricing adjustments), the rules provide a safe harbour and SIDLR may not apply.

Practical Takeaway:
Before relying on interest deductibility for intra-group financing, businesses must check both SIDLR (use of funds, main-purpose, lender’s tax profile) and GIDLR (30% cap and AED 12m).

Key Exceptions and Reliefs Under GIDLR

1. Banks, insurance providers, and natural persons

The GIDLR does not apply to:

• Banks
• Insurance Providers
• Natural persons undertaking Business or Business Activities in the UAE (e.g. an individual carrying on a business directly)

CTGIDL1 clarifies that investment holding entities are fully subject to GIDLR, even if they conduct limited activities.

However:

• These Persons must still comply with general deductibility and SIDLR, and
• If a natural person operates via a juridical entity (e.g. one-person LLC), that company is subject to GIDLR like any other entity.

2. Historical financial liabilities (grandfathering)

NIE on certain historical financial liabilities (debt instruments or other liabilities with terms agreed before 9 December 2022) can be outside GIDLR, subject to MD 126 conditions, including:

• Only the lower of:
  • NIE actually incurred in the period, or
  • NIE that would have arisen based on the terms as they stood on 9 December 2022, is relieved;
• The relief also extends to hedging contracts entered to mitigate interest rate risk on those historical liabilities (even if hedges are entered after 9 December 2022);
• If the terms of the historical debt are modified after 9 December 2022 (e.g. interest rate, maturity, security), the debt may lose its grandfathered status, and the related NIE becomes subject to GIDLR.

Businesses with pre-December 2022 financing should keep strong documentation of:

• Loan agreements and amendments,
• Drawdown schedules, and
• Associated hedging contracts.

MD 126 is strict: ANY modification to a loan after 9 December 2022 potentially removes grandfathering, even if commercially minor.

FTA expects businesses to maintain full loan documentation to prove “no modification.”

3. Qualifying Infrastructure Projects (QIP)

NIE relating to a Qualifying Infrastructure Project (QIP) undertaken by a Qualifying Infrastructure Project Person can be excluded from GIDLR, where the conditions in Article 14 of MD 126 are met.

In broad terms (simplified), a Qualifying Infrastructure Project Person is a Resident Person that in the relevant Tax Period:

• Provides, maintains, or operates a project that meets the definition of a Qualifying Infrastructure Project (e.g., public utilities, roads, hospitals, etc., under specific criteria), or
• performs ancillary activities that facilitate such projects.

Even where NIE on a QIP is exempt from GIDLR, the general deductibility rules and SIDLR still apply.

CTGIDL1 further clarifies that QIP relief is project-specific, not entity-wide. Only interest tied to the certified QIP is excluded.

4. Small Business Relief (SBR)

Where a Taxable Person elects Small Business Relief (SBR) and is treated as having no Taxable Income for that period, any disallowed NIE from earlier periods can still be carried forward and used in a future period when SBR is not claimed.

Important point: SBR does not eliminate IDLR obligations for the year—NIE carry-forward tracking still applies.

Tax Groups and IDLR

Where a Tax Group is formed under Article 40 of the CT Law:

• GIDLR applies at the Tax Group level, not separately to each member.
• Net Interest Expenditure and Adjusted EBITDA are computed for the group as a single Taxable Person.
• If any member is a Bank or Insurance Provider (which is not subject to GIDLR), its interest income and expenditure are excluded from the group’s NIE and Adjusted EBITDA calculations.

Carried-forward NIE:

• Pre-grouping NIE of a Subsidiary can only be used against the group income attributable to that Subsidiary.
• On cessation of a Tax Group, unutilised NIE usually remains with the Parent Company if it continues as a Taxable Person; otherwise, it is largely lost, subject to limited exceptions for pre-grouping NIE of Subsidiaries.

Group financing structures should therefore be planned together with any current or future tax-grouping decisions.

CTGIDL1 stresses that internal interest within a tax group is eliminated entirely before computing NIE.

Practical Implications for UAE Businesses

Who is Most Affected?

You should pay particular attention to IDLR if you are:

• A highly leveraged business (e.g., real estate, construction, capital-intensive industries)
• Using intra-group or shareholder loans
• Running project finance or long-term infrastructure contracts
• Part of a multi-entity UAE or cross-border group
• Considering dividends or capital restructuring funded by related-party debt

Key Action Points

1. Map your financing

• Identify all sources of Interest (including leases, hedges, Islamic finance).
• Determine which loans are related-party and which pre-date 9 December 2022.

2. Run a GIDLR model

• Calculate your NIE, Adjusted EBITDA, and apply the AED 12m / 30% test.
• Forecast disallowed NIE and cash-tax impact over several years.

3. Check SIDLR exposure

• Review whether any Related Party loans are used for distributions, capital injections or equity acquisitions.
• Document your business rationale and the lender’s effective tax rate if you rely on the main-purpose or 9% safe-harbour tests.

4. Review documentation

Maintain:

• Loan and hedging agreements,
• Board minutes and funding memoranda,
• Transfer pricing analyses for interest rates and terms.

5. Consider restructuring

• Rebalance between debt and equity if you consistently breach the 30% cap.
• Explore whether some projects qualify as QIP or whether existing loans can be refinanced in a tax-efficient way without losing grandfathering.

6. Align with tax group / SBR strategy

• If forming a Tax Group, revisit how IDLR will apply at the group level.
• If using Small Business Relief, track carried-forward NIE carefully for future utilisation.

How German FinTax Consultancy Can Support

At German FinTax Consultancy, we work with UAE businesses across sectors to:

• Review current financing and leasing structures from an IDLR perspective
• Build scenario models for GIDLR (including 10-year carry-forward projections)
• Assess SIDLR risk and help prepare robust main-purpose and arm’s-length documentation
• Advise on group financing, tax grouping and restructuring options
• Assist with FTA queries or audits involving interest deductibility