UAE Ministry of Finance has unveiled major provisions on tax groups, net interest expenditure deduction, etc. as part of the corporate tax requirements. Image Credit: Vijith Pulikkal/Gulf News

Dubai: The maximum interest cap that can be deducted by businesses under the UAE Corporate Tax rules has been issued by the Ministry of Finance.

Under this, the net interest expenditure that can be deducted is capped at the higher of 30 per cent of adjusted EBITDA. Or it can be a 'safe harbour' amount of Dh12 million.

Tax groups with members who are banks and/or insurance providers must exclude these members' income and expenditure when determining the 30 per cent EBITDA threshold.

The new rule - titled 'General Interest Deduction Limitation Rule' - sets out the maximum cap of interest that can be deducted by businesses that are not banks, insurance providers or natural persons (individuals) undertaking a business or business activity in the UAE.

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These are excluded

Long-term infrastructure projects that meeting relevant conditions will not face restrictions on interest expenditure deductibility under the Rule.

Interest incurred on debt instruments entered into before the Law was published to the general public on December 9, 2022 will not be subject to the limitation rule.

Tax groups

UAE resident-entities that are 95 per cent or more commonly owned can form or join a 'tax group'. They will be treated as a single entity for corporate tax purposes.

Under the ministry's decision, the parent company must own at least 95 per cent of the voting rights and shares in each entity to form the group. Also, all members of the tax group must be considered UAE residents for corporate tax purposes.

"Forming a tax group simplifies the calculation and reporting of taxable income by allowing the parent company to file a single tax return," said a statement. This would be 'based on the aggregated taxable profit or loss of the group'. Transactions between the members of the tax group would be 'generally disregarded'.

The decision also clarifies the notification procedures if a subsidiary leaves a tax group or if the tax group ceases to meet the qualifying conditions.

"With tax grouping, groups are treated as if they were one entity which alleviates the administration and compliance burden," said Younis Haji Al Khouri, Undersecretary of the Ministry of Finance.

'Unincorporated partnership'

An 'unincorporated partnership' will not be considered a taxable person provided it is not a corporate entity (juridical person).

Where a unincorporated partnership elects to be treated as a taxable person in its own right, its decision is irrevocable once approved.

Any change in the partnership composition must be notified to the FTA within 20 business days.

A 'foreign partnership' treated as an unincorporated partnership must submit an annual declaration confirming that it is not taxed under foreign jurisdiction laws. And each partner is taxed individually based on their share of income.

The decision also sets out that for a 'family foundation' to be treated as a unincorporated partnership where one or more of its beneficiaries are public benefit entities, it must confirm that either the public benefit entity does not derive income treated as Taxable Income.

Or, if they do, that such income is distributed to the respective beneficiaries within six months from the end of the relevant tax period.