The UAE’s Federal Tax Authority (FTA) has released important clarifications that give startups and small businesses much-needed clarity on how corporate tax—and specifically, interest expense deductions—will be handled from 2024 to 2026.
At the heart of this update is the Small Business Relief (SBR) program, a key policy that allows businesses with annual revenue under AED 3 million to opt out of corporate tax until the end of 2026. But while this is great news for qualifying SMEs, it comes with specific conditions—especially when it comes to interest expenses.
What Is Small Business Relief (SBR)?
If your UAE-registered business generates AED 3 million or less in revenue in any tax year between 2024 to 2026, you can apply for SBR. This means:
- No corporate tax liability for that year
- Simplified compliance with tax filing obligations
However, opting into SBR also means making a trade-off.
Key Limitation: No Deduction for Interest Expenses
One of the biggest limitations under SBR is that net interest expenses cannot be deducted—either in the current year or carried forward to future years within the SBR period. Here’s why:
- Under SBR, your business is treated as having no taxable income
- As a result, no deductions—including interest on loans or financing—are allowed
- Any net interest expense from that tax year cannot be carried forward into 2025 or 2026
Important: If your business decides not to opt into SBR in a given year (say 2024), but qualifies in 2025 or 2026, then:
- You can still opt into SBR in those later years
- But any interest expense from 2024 won't be deductible in 2025 or 2026 under SBR
Strategic Insight: When Skipping SBR Might Be Wiser
According to tax advisors, loss-making businesses may benefit from skipping SBR—despite the short-term tax relief. Why?
- If you incur a loss in 2024 (including interest expenses), but still opt for SBR, you lose the chance to carry those losses forward
- However, by not opting for SBR, you can record those losses and offset them against future profits after 2026
In fact, under current rules, unclaimed interest expenses from 2024 can be carried forward for up to 10 tax periods—but only if you didn’t opt into SBR during that period.
What Qualifies as Interest Expenses?
The FTA defines interest in broader terms than just loan repayments. Here’s what may be considered as interest expenses for corporate tax purposes:
- Loan interest
- Guarantee or arrangement fees
- Underwriting and legal fees related to borrowing
- Prepayment or early payment penalties
But not all interest expenses are allowed:
- Those not linked to the business activity
- Expenses tied to generating exempt income
- Non-arm’s-length transactions with related parties
The Dh12 Million Rule – And Why It Matters
If your business borrowed before Dec 9, 2022, all interest expenses on that borrowing are fully deductible.
For borrowings after Dec 9, 2022, here’s the breakdown:
- Interest expenses up to AED 12 million per year: fully deductible
- Above AED 12 million: Only 30% of your EBITDA is allowed as a deduction
Final Word: Choose Your Tax Strategy Carefully
While SBR offers simplicity, it may not be the best fit for every business. Here’s a quick decision guide:
| Situation | SBR Recommended? |
|---|---|
| Consistently profitable | Yes — reduces admin and tax burden |
| Early-stage, running at a loss | No — better to preserve loss carryforward |
| Taking on significant debt | No — interest deductions may outweigh SBR benefits |
Tip from Ninjaz: Before committing to SBR, evaluate your expected profits, loan interest, and long-term tax strategy. Sometimes, paying tax now could save you much more later.
Need help making the right tax election or structuring your UAE business to reduce liabilities? Talk to Ninjaz. We help startups and small businesses stay ahead of the curve with smart setup and compliance strategies.
