In this month’s edition, we bring you crucial updates on corporate and indirect tax developments in the UAE. Our goal is to provide you with a comprehensive digest of the latest tax news, legislative changes, and enforcement actions in the United Arab Emirates (UAE). This edition highlights key developments from May 2025, along with important alerts.
The UAE Federal Tax Authority (FTA) has issued a comprehensive Corporate Tax (CT) Guide in April 2025, clarifying the Interest Deduction Limitation Rules under Federal Decree-Law No. 47 of 2022 (UAE CT Law). These rules aim to align with global anti-BEPS (Base Erosion and Profit Shifting) standards, particularly OECD BEPS Action 4, by restricting excessive interest deductions.
This newsletter breaks down the Guide’s key provisions, including:
– Definition of “interest” under the UAE CT Law.
– Specific and General Limitation Rules for deductibility.
– Exemptions and special cases.
– Compliance actions for businesses to optimize deductions.
Includes conventional interest, Shariah-compliant profits, fees (e.g., arrangement, guarantee), and payments “economically equivalent” to interest. Excludes trade discounts, penalties, and equity-related premiums.
Annual interest deduction capped at 30% of Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). Threshold: AED 12 million (prorated for short tax periods). Excess amounts can be carried forward for 10 years.
Disallows entire interest if the primary purpose of a related-party loan is to gain a tax advantage (e.g., funding dividends, capital reductions). Exceptions apply if the lender is subject to a 9% + foreign tax rate.
Banks, insurers, natural persons, and qualifying infrastructure projects are exempt from the 30% EBITDA cap.
The Guide broadly defines interest to include:
– Conventional interest and Islamic finance profit/mark-up.
– Fees tied to raising finance (e.g., guarantee, underwriting, legal fees for financing).
– Implicit interest in leases, repo transactions, and factoring fees.
– Foreign exchange gains/losses linked to interest (but not principal).
Interest deductions must be evaluated in this sequence:
– General deductibility principles: Expense must be wholly incurred for business, not capital or private.
– Arm’s Length Principle (ALP): Related-party interest must align with the market rate.
– Specific Limitation Rule: Blocks deductions for tax-advantage-driven related-party loans.
– General Limitation Rule: 30% EBITDA cap (post Steps 1–3).
Public Clarification VATP044 – Concerned Services: Accounting for Output Tax, Issuance of Tax Invoices, and Input Tax Recovery
The Federal Tax Authority (FTA) has issued Public Clarification VATP044 to address key compliance requirements related to the treatment of “Concerned Services” under the UAE VAT regime. This clarification offers critical guidance on the correct accounting for output tax, the mandatory issuance of self-tax invoices, and the documentary standards necessary for the recovery of input VAT on imported services.
In accordance with Article 1 of the Federal Decree-Law on VAT, Concerned Services are defined as services imported into the UAE where the place of supply is deemed to be within the State, and which would not be exempt if supplied locally. These services are subject to VAT under the Reverse Charge Mechanism (RCM), with the obligation to account for VAT resting with the UAE recipient.
VATP044 explicitly reaffirms that VAT-registered recipients of such imported services are considered, for VAT purposes, to be making a supply to themselves. Consequently, they are required to issue a valid full tax invoice to themselves, commonly referred to as a self-tax invoice, within 14 days from the date of supply. This obligation applies for each instance of service importation, unless an exception applies.
While the issuance of a self-tax invoice is a general requirement for imported services under the reverse charge mechanism, the Federal Tax Authority (FTA) acknowledges practical challenges in certain scenarios and has outlined specific exceptions to ease administrative burdens. These exceptions are governed by Article 59(7)(b) of the Executive Regulation and further clarified under Public Clarification VATP044.
In circumstances where it is not practically feasible for a VAT registrant to issue a self-invoice, the FTA may allow an exception if all the following conditions are met:
In exceptional cases, such as reinsurance where overseas suppliers do not issue invoices, alternative documentation can be treated as the suppliers’ invoices, provided it reflects the following key details:
If the VAT registrant fails to obtain or retain the supplier invoice or cannot furnish documentation containing the minimum prescribed information, the exception cannot be applied. In such cases, the registrant must seek a formal administrative exception from the FTA in accordance with Article 59(7) of the Executive Regulation.
Where a VAT registrant qualifies for the exception from issuing a self-invoice by maintaining either a valid overseas supplier invoice or an acceptable combination of supporting documents, input tax may be recovered in line with the general VAT recovery provisions.
Specifically, input VAT incurred under the reverse charge mechanism on imported services may be claimed in:
provided that the underlying Concerned Services are used, or intended to be used, for making taxable supplies, and the registrant has met the payment obligation or has the intention to settle the amount due to the supplier within six-month period. This approach aligns with the broader principles of VAT recovery under the UAE VAT public clarification VATP017.
Let’s start a conversation
Adding {{itemName}} to cart
Added {{itemName}} to cart