Ministerial Decision No 126 of 2023 General Interest Deduction Limitation Rule

Aug 12, 2023 | KCG Library

Brief

The Ministry of Finance released Decision No. 126 of 2023 regarding the General Interest Deduction Limitation Rule on May 22nd. This decision falls under the Federal Decree-Law No. 47 of 2022, which governs the taxation of corporations and businesses (referred to as the ‘CT Law’ hereafter). The decision took effect on the day following its publication.

Key Highlights

The Decision elaborates on the Rule regarding the Limitation on General Interest Deduction (“GIDLR”) and outlines the provisions concerning its application. The primary features of the Decision are outlined as follows.

Interest

The Decision clarifies that for the purpose of the GIDLR, any financial gains or payments related to a financial asset or liability that represent an interest or are economically equivalent to interest will be considered, regardless of their classification and treatment under the International Financial Reporting Standards (IFRS)

Furthermore, the Decision emphasizes that the following types of payments will be deemed as interest for the GIDLR:

Costs incurred in the process of obtaining financing, including fees for guarantees, arrangement fees, commitment fees, and any other fees of a similar nature.
Interest in Islamic financial instruments that comply with Sharia principles and any equivalent mechanisms or a combination thereof.
The interest component of forward contracts, futures contracts, options, interest rates, foreign exchange swap agreements, or any other financial derivative instruments.
The financing portion of payments is related to finance and non-finance leases.
Foreign exchange gains and losses arising from interest.
Interest that has been capitalized

In summary, the Decision provides clarity on the inclusion of various types of payments and gains as interest for the purpose of the GIDLR, regardless of their treatment under IFRS. The Decision introduces a safe harbor provision, which sets a threshold of AED 12 million for the Net Interest Expenditure (NIE). If the NIE falls below this threshold, the General Interest Deduction Limitation Rule (GIDLR) will not apply. However, if the NIE exceeds the threshold, the Taxable Person is eligible to deduct the higher of the threshold amount or 30% of the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This provision allows for a more favorable deduction for eligible businesses, ensuring a balanced approach to the application of the GIDLR.

EBITDA

The Decision outlines the methodology for calculating EBITDA, which involves adjusting the Taxable Income for various items. These adjustments include the Net Interest Expenditure (NIE) for the relevant Tax Period, excluding any NIE related to Qualifying Infrastructure Projects. It also takes into account the depreciation and amortization expenditure considered in determining the Taxable Income for the relevant Tax Period, as well as any interest income or expenditure associated with historical financial assets or liabilities held before 9 December 2022.

If, after applying the above calculation, the EBITDA is negative, the amount of EBITDA considered for determining the 30% limit will be AED 0, ensuring that no deduction is allowed in such cases.

Furthermore, the Decision specifies that the NIE attributed to debt instruments, whose terms were agreed upon before 9 December 2022, is exempt from the application of the GIDLR. It is important to note that the NIE incurred by a Qualifying Infrastructure Project Person, who meets the prescribed conditions outlined in the Decision, will not be subject to the GIDLR.

These provisions provide clarity and guidelines for the calculation of EBITDA and the treatment of certain interest-related expenditures, ensuring a fair and consistent application of the GIDLR.

KCG Insights

The Decision introduces a safe harbor amount of AED 12 Million for Net Interest Expenditure (NIE), below which the General Interest Deduction Limitation Rule (GIDLR) will not apply.

If the NIE threshold is exceeded, businesses can deduct the higher of the threshold or 30% of Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA).
The methodology for computing EBITDA involves adjusting the Taxable Income by considering NIE, depreciation and amortization expenditure, and interest income or expenditure related to historical financial assets or liabilities held before 9 December 2022.
In cases where the calculated EBITDA is negative, the amount considered for the 30% limit will be AED 0, resulting in no deduction.
NIE attributed to debt instruments with terms agreed upon before 9 December 2022 is exempt from the application of the GIDLR.
NIE incurred by Qualifying Infrastructure Project Persons meeting prescribed conditions is not subject to the GIDLR.
These key takeaways provide a summary of the important aspects of the Decision and its implications for businesses operating in Dubai.