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Specific interest deduction limitation

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-INTSPEC-2024.1
By

When is related party loan interest not deductible in the UAE?

When the loan funds a dividend, capital return, contribution or acquisition involving a Related Party, unless gaining a tax advantage is not the main purpose.

Per Federal Decree-Law No. 47 of 2022, Article 31, Specific Interest Deduction Limitation Rule

No deduction is allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of a dividend or profit distribution to a Related Party, a redemption, repurchase, reduction or return of share capital to a Related Party, a capital contribution to a Related Party, or the acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition — unless the Taxable Person can demonstrate that the main purpose of obtaining the loan and carrying out the transaction is not to gain a Corporate Tax advantage. No Corporate Tax advantage is deemed to arise where the Related Party is subject to Corporate Tax, or a tax of a similar character abroad, on the Interest at a rate not less than the rate the article compares against.

An anti-avoidance limitation independent of Article 30: it applies whether or not the general cap does, and Article 30(5) then removes what this article disallows from the general calculation. Where it bites, the disallowance is the whole amount — the article allows no proportion.

The prohibition, the defence and the safe harbour

31(1) — the four transactions

The loan must be from a Related Party, directly or indirectly, and obtained in respect of one of these.

  • (a) A dividend or profit distribution to a Related Party
  • (b) A redemption, repurchase, reduction or return of share capital to a Related Party
  • (c) A capital contribution to a Related Party
  • (d) The acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition

31(2) — the defence, and where the burden sits

The prohibition does not apply where the Taxable Person CAN DEMONSTRATE that the main purpose of obtaining the loan and carrying out the transaction is not to gain a Corporate Tax advantage. What can be demonstrated is not the same as what is the case, and the article puts the burden on the taxpayer.

31(3) — the safe harbour, which is objective

No Corporate Tax advantage is deemed to arise where the Related Party is subject to Corporate Tax, or a tax of a similar character under the legislation of a foreign jurisdiction, on the Interest at a rate not less than the rate in Article 3(1)(b). This needs no demonstration, so it is tested before the purpose question — asking a person to argue purpose when the rate test already answers it would put a burden on them the article lifts.

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. The purpose question is put only where the prohibition is engaged and the rate comparison has not already answered it.

  2. 2

    Loan from a Related Party

    The prohibition reaches a loan obtained directly or indirectly from a Related Party. Where the loan is not, this article disallows nothing and Articles 30 and 28 still apply.

  3. 3

    Transactions listed in Article 31(1)

    The loan must have been obtained in respect of one of the four listed transactions.

  4. 4

    No Corporate Tax advantage deemed to arise

    Article 31(3). Where the Related Party is taxed on the Interest at not less than the comparison rate, no advantage is deemed to arise and no demonstration of purpose is required.

  5. 5

    Main purpose not to gain a Corporate Tax advantage

    Article 31(2). Where the Taxable Person can demonstrate it, the prohibition does not apply. Whether the demonstration succeeds is the person's determination, not this rule's.

  6. 6

    Interest on a Related Party loan for a listed transaction

    Where the prohibition is engaged and neither Clause 2 nor Clause 3 relieves it, the whole amount is disallowed.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Shareholder loan funding a distribution

A company borrows AED 50,000,000 from its parent to fund a dividend to that parent, and cannot demonstrate that the main purpose was anything other than a Corporate Tax advantage. Interest for the period is AED 2,750,000.

Computed

No deduction for the interest of AED 2,750,000 as computed: the loan was obtained, directly or indirectly, from a Related Party in respect of Article 31(1)(a) — a dividend or profit distribution to a Related Party, and the main purpose has not been demonstrated to be something other than gaining a Corporate Tax advantage. Article 31 allows no proportion, so the disallowance is the whole amount.

Workings

Interest expenditure on the loanas supplied
AED 2,750,000
Disallowed by Article 31Article 31(1)(a) — a dividend or profit distribution to a Related Party
AED 2,750,000

Decided by the interest on a related party loan for a listed transaction

The same loan, where the lender is taxed on the interest

The same facts, except the parent is subject to tax on the interest in its own jurisdiction at a rate not below the comparison rate — so Article 31(3) deems no Corporate Tax advantage to arise.

Computed

Article 31 does not disallow the interest of AED 2,750,000 as computed: the Related Party is subject to tax on the Interest at an effective rate of 15%, which is not less than the 9% rate Article 31(3) compares against for FY2026, so no Corporate Tax advantage is deemed to arise. No demonstration of purpose is required.

Workings

Interest expenditure on the loanas supplied
AED 2,750,000
Effective rate of tax on the Interest in the Related PartyArticle 31(3) — as supplied
15%
Comparison rateArticle 31(3), by reference to Article 3(1)(b) — published value for FY2026
9%
Disallowed by Article 31nil — the prohibition in Clause 1 does not bite
AED 0

Decided by the no corporate tax advantage deemed to arise

Group acquisition with a commercial rationale

A loan from a sister company to acquire an ownership interest in a business that becomes a Related Party, where the person can demonstrate the main purpose was the acquisition itself. Interest of AED 900,000.

Computed

Article 31 does not disallow the interest of AED 900,000 as computed: the loan was obtained from a Related Party in respect of Article 31(1)(d) — the acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition, but you have indicated the Taxable Person can demonstrate that the main purpose of the loan and the transaction is not to gain a Corporate Tax advantage, which Article 31(2) requires. Whether the demonstration succeeds requires your determination.

Workings

Interest expenditure on the loanas supplied
AED 900,000
Disallowed by Article 31nil — the prohibition in Clause 1 does not bite
AED 0

Decided by the main purpose not to gain a corporate tax advantage

Third-party bank borrowing

Interest of AED 4,000,000 on ordinary bank debt used to fund a distribution. The transaction is listed, but the lender is not a Related Party.

Computed

Article 31 does not disallow the interest of AED 4,000,000 as computed: the prohibition applies to a loan obtained, directly or indirectly, from a Related Party, and you have indicated this loan was not. The general limitation in Article 30 and the general rule in Article 28 still apply.

Workings

Interest expenditure on the loanas supplied
AED 4,000,000
Disallowed by Article 31nil — the prohibition in Clause 1 does not bite
AED 0

Decided by the loan from a related party

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

3 inputs still need your determination:

  • What Interest expenditure was incurred on the loan, after any adjustment to an arm's length rate under Article 34? The excess over arm's length is disallowed first, and is not carried forward.
  • Was the loan obtained, directly or indirectly, from a Related Party?
  • Which of the Article 31(1) transactions was the loan obtained in respect of, if any?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Thresholds

uae.corporate_tax_standard_rate
9% · reviewed 2026-09-28 · source

Threshold values are published separately from the rule and carried with a citation. Where none has been published for the period being computed, the rule reports that rather than applying a default.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader