By Freezone RA Editorial | August 2026
Most free zone owners treat money moving between their own companies as an internal housekeeping matter. It is not. The moment interest is charged, the arrangement becomes a tax transaction, and an intercompany loan corporate tax UAE position is tested three separate times before a single dirham of that interest becomes deductible. Two of those three tests disallow interest permanently, with no carry-forward, and free zone status does nothing to switch any of them off.
Related-party lending is a tax transaction before it is a treasury decision
When a free zone entity lends to or borrows from another company in its group, the arrangement falls squarely under UAE Federal Decree-Law No. 47 of 2022, the Corporate Tax Law. Treasury teams tend to see intercompany advances as flexible internal funding. The law sees a financing agreement between Related Parties, with defined pricing obligations attached.
Article 35 sets out who is a Related Party. Two juridical persons are Related Parties where one, alone or together with its Related Parties, holds a 50% or greater ownership interest in the other, or exercises Control. Control includes the ability to exercise 50% or more of the voting rights, to determine the composition of 50% or more of the board of directors, to receive 50% or more of the profits, or to exercise significant influence over the conduct of the business. Natural persons are Related Parties where they are related within the fourth degree of kinship or affiliation, including by adoption or guardianship. That last limb catches far more family shareholdings than owners expect.
Article 36 adds Connected Persons: the owners, directors and officers of the Taxable Person, and the Related Parties of any of them. Payments or benefits to a Connected Person are deductible only where they correspond with the Market Value of the service provided and are incurred wholly and exclusively for the purposes of the business.
Article 34 then applies the Arm’s Length Principle. A transaction with a Related Party must be priced as it would have been between independent parties. Charge above the arm’s length rate and the interest is adjusted down for tax purposes, and the excess is gone.
The order the three tests run in decides your answer
A common error is to reach for the interest cap first and check the pricing afterwards. On any intercompany loan corporate tax UAE question, the Federal Tax Authority’s Interest Deduction Limitation Rules Corporate Tax Guide (CTGIDL1, April 2025) and Ministerial Decision No. 126 of 2023 set a fixed sequence, and the sequence changes the outcome.
First, general deductibility and the Arm’s Length Principle under Article 34. Second, the Specific Interest Deduction Limitation Rule in Article 31. Third, and only on whatever survives, the General Interest Deduction Limitation Rule in Article 30. The sequence matters because the consequences differ: an Article 34 or Article 31 disallowance is permanent, while an Article 30 disallowance is merely deferred. Aligning your calculations with the UAE free zone transfer pricing rules at the pricing stage is what keeps a deduction recoverable rather than lost.
Take a UAE company that borrows AED 20 million from a related company in a jurisdiction with a 9% effective tax rate, at 7%, when the arm’s length rate for equivalent borrowing is 5%. The AED 1.4 million of interest is first adjusted under Article 34 down to AED 1 million. The AED 400,000 difference is disallowed on pricing grounds and cannot be carried forward, because it is not an Article 30 disallowance. Only the surviving AED 1 million goes on to tests two and three.
| Test | Legal basis | What it does | Can the disallowed amount be carried forward? |
|---|---|---|---|
| 1. Arm’s Length Principle | Article 34 | Adjusts related-party interest down to the independent market rate | No. The excess is lost permanently |
| 2. Specific Interest Deduction Limitation Rule | Article 31 | Disallows interest on a related-party loan that funds four named equity transactions | No. The disallowance is permanent |
| 3. General Interest Deduction Limitation Rule | Article 30 | Caps Net Interest Expenditure above AED 12 million at the greater of 30% of adjusted EBITDA or AED 12 million | Yes. Carried forward for up to 10 subsequent Tax Periods |
Four uses of a related-party loan lose the deduction outright
Article 31 blocks the deduction for interest on a loan obtained, directly or indirectly, from a Related Party where the proceeds fund particular transactions. The word “loan” is read widely here, covering any borrowing, line of credit, bond, or transaction akin to a loan, so an informal running account between group companies is not outside the rule.
Interest is disallowed where the related-party loan funds any of the following:
- 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;
- the acquisition of an ownership interest in a Person who is, or becomes, a Related Party after the acquisition.
The FTA’s own worked example is blunt. A UAE company borrows AED 10 million from its foreign parent at an arm’s length rate of 5%, producing AED 500,000 of annual interest, and uses the money to buy back some of its own shares from that parent. The rate is correct and the transaction is commercially ordinary, yet the company cannot show that the main purpose was something other than a Corporate Tax advantage. The whole AED 500,000 is disallowed every year the loan runs, and none of it can be carried forward.
The main purpose test is your only exit, and you carry the burden
Article 31 does not apply where you can demonstrate that the main purpose of obtaining the loan and carrying out the transaction was not to gain a Corporate Tax advantage. Under Article 50(2), a Corporate Tax advantage includes a refund or increased refund of Corporate Tax, avoidance or reduction of Corporate Tax Payable, deferral of a payment of Corporate Tax, or avoidance of an obligation to deduct or account for Corporate Tax. The onus sits entirely with the Taxable Person, which means the evidence has to exist before the question is ever asked.
There is one presumption in your favour. No Corporate Tax advantage is deemed to arise where the Related Party lender is subject to Corporate Tax, or a tax of a similar character in a foreign jurisdiction, at an effective rate of not less than 9% on the interest. Where the effective rate is below 9%, or the interest income is exempt or enjoys preferential treatment, the presumption falls away and you are back to proving commercial purpose yourself.
The AED 12 million de minimis keeps most free zone companies out of Article 30
Article 30 operates on Net Interest Expenditure: interest expenditure incurred in the Tax Period, including any amount carried forward, less interest income earned in that period. Where Net Interest Expenditure sits at or below AED 12 million across a 12-month Tax Period, no adjustment is required at all. For a Tax Period longer or shorter than 12 months, the AED 12 million de minimis is adjusted in proportion to its length.
Where Net Interest Expenditure exceeds AED 12 million, the deductible amount is the greater of 30% of adjusted EBITDA for the period, or the AED 12 million de minimis. Adjusted EBITDA starts from Taxable Income and adjusts for Net Interest Expenditure, for depreciation and amortisation taken into account in determining that Taxable Income, for net interest expenditure on historical financial assets or liabilities held before 9 December 2022, and for net interest expenditure on Qualifying Infrastructure Projects.
Anything disallowed here is deferred rather than destroyed. It carries forward into the subsequent 10 Tax Periods on a first-in, first-out basis, subject to meeting the rule’s conditions in the later period. It cannot be transferred to another Taxable Person, and where a subsidiary carrying such a balance joins a Tax Group, the balance can only be used against the Tax Group’s Taxable Income attributable to that subsidiary. The ring-fencing logic is the same one that governs corporate tax loss relief for free zone entities.
Article 30 exempts Banks, Insurance Providers, and natural persons undertaking a Business or Business Activity in the UAE, and the Minister has not specified anyone else. Read the exemption narrowly, because the guide does. It does not extend to treasury companies, captive insurance companies, other non-regulated financial entities carrying out quasi-banking or insurance activities, or to investment vehicles, whether regulated by the SCA, the DIFC or the ADGM, or unregulated. A group finance company sitting in a free zone is exactly the entity that reads itself into this exemption and is wrong.
Free zone status does not switch the interest rules off
The FTA’s interest deduction guide contains no free zone carve-out of any kind. A Free Zone Person, including a Qualifying Free Zone Person, is a Taxable Person, and Articles 30, 31 and 34 apply to it in full. Sitting inside a free zone boundary does not change who is a Related Party and does not suspend the Arm’s Length Principle.
The consequence is sharper than most owners assume, because of how a Qualifying Free Zone Person is taxed. It pays 0% on Qualifying Income and 9% on non-Qualifying Taxable Income, and it does not receive the AED 375,000 zero-rate band available to ordinary taxable businesses. The 9% applies to the whole of its non-qualifying Taxable Income from the first dirham. So where interest is disallowed against non-qualifying income, there is no threshold underneath to absorb it.
Lending to a Related Party can be Qualifying Income, lending to your shareholder cannot
Ministerial Decision No. 229 of 2025, issued on 28 August 2025, repealed and replaced Ministerial Decision No. 265 of 2023 on Qualifying and Excluded Activities, with effect from 1 June 2023. Anyone still working from the 2023 list is working from a repealed instrument.
Under Article 2(1)(j) of the 2025 decision, treasury and financing services to Related Parties, or for the entity’s own account, is a Qualifying Activity. It covers cash and liquidity management, financing, debt management, and financial risk management and related advisory services, including centralised payment and collection activities. The words “or for its own account” are new against the 2023 text, and they matter for a free zone treasury centre managing its own book rather than only servicing group members.
Article 2(2)(d) makes finance and leasing activities an Excluded Activity, without prejudice to the Qualifying Activities at paragraphs (c), (e), (j) and (k). Lending that sits outside the treasury-and-financing-to-Related-Parties carve-out therefore produces non-qualifying revenue. Article 2(2)(a) goes further: any transaction with a natural person is an Excluded Activity, except transactions relating to ships, fund management, wealth and investment management, and aircraft financing and leasing. A loan from a free zone company to its individual shareholder lands on the excluded side of that line, and so does the interest it earns.
Non-qualifying revenue then has to clear the de minimis test: it must not exceed the lower of AED 5,000,000 or 5% of total Revenue. Breach it and the entity loses Qualifying Free Zone Person status for that Tax Period and the four subsequent Tax Periods, five in total. A single mispriced shareholder loan will rarely be large enough to do that on its own, but it is added to every other non-qualifying dirham the entity earns, and the penalty for the aggregate crossing the line is not proportionate. The full conditions are set out in our Qualifying Free Zone Person corporate tax guide.
| Who the counterparty is | Activity classification under MD 229 of 2025 | Effect on Qualifying Income |
|---|---|---|
| A Related Party that is a juridical person | Treasury and financing services to Related Parties, Article 2(1)(j) | Qualifying Activity. Interest earned is Qualifying Income taxed at 0% |
| An individual shareholder, director or family member | Transaction with a natural person, Article 2(2)(a) | Excluded Activity. Interest earned is non-qualifying revenue and counts against the de minimis test |
| An unrelated third-party business | Finance and leasing activities, Article 2(2)(d) | Excluded Activity unless it falls inside paragraphs (c), (e), (j) or (k). Otherwise non-qualifying revenue |
What to document before your next intercompany loan
Every one of these tests is decided on evidence that has to exist already, so the intercompany loan corporate tax UAE file you build at signing is the file you will be judged on years later. Ministerial Decision No. 97 of 2023 requires a Master File and a Local File where Revenue in the Tax Period is AED 200 million or more, or where the entity is a constituent entity of a multinational group with total consolidated group revenue of AED 3.15 billion or more. Below both thresholds the documentation obligation falls away, but the Arm’s Length Principle does not. It applies to every related-party transaction at any size, and the Federal Tax Authority can still ask you to show that your rate reflects market conditions.
Before the next advance leaves your account, put the following in place:
- A written loan agreement executed before disbursement, stating the principal, the interest rate and calculation method, the repayment schedule and the commercial purpose.
- Benchmarking evidence supporting the rate against independent lending on comparable terms and credit risk, retained whether or not you meet the AED 200 million or AED 3.15 billion documentation thresholds.
- A record of what the money was actually used for, checked against the four Article 31 transactions before the funds move rather than afterwards.
- Contemporaneous main purpose evidence wherever the lender’s effective tax rate on the interest is below 9%, since the presumption in your favour does not apply there.
- An annual Net Interest Expenditure calculation, so you know whether the AED 12 million Article 30 threshold has been crossed before the return is due.
- For a Qualifying Free Zone Person, a running total of non-qualifying revenue tested against the lower of AED 5,000,000 or 5% of total Revenue.
Corporate Tax returns are filed within 9 months of the end of the Tax Period, and records must be kept for 7 years. On a loan that runs for several years, the interest position is re-tested in every one of those periods, so an arrangement that was defensible when it was signed can drift out of compliance without anyone re-papering it.
Frequently Asked Questions
Is a Qualifying Free Zone Person exempt from the interest deduction limitation rules?
No. The FTA’s Interest Deduction Limitation Rules guide, CTGIDL1, contains no free zone carve-out. A Free Zone Person, including a Qualifying Free Zone Person, is a Taxable Person, so Articles 30, 31 and 34 apply in full. The only statutory exemptions from Article 30 are Banks, Insurance Providers and natural persons carrying on a Business in the UAE.
What happens if an intercompany loan is used to pay a dividend to the parent company?
Interest on a related-party loan that funds a dividend or profit distribution to a Related Party is disallowed under Article 31. Unless you can demonstrate that the main purpose of the loan and the distribution was not to obtain a Corporate Tax advantage, the deduction is lost permanently and cannot be carried forward to any later Tax Period.
How long can disallowed net interest expenditure be carried forward?
Net Interest Expenditure disallowed under Article 30 carries forward into the subsequent 10 Tax Periods on a first-in, first-out basis, subject to meeting the rule’s conditions in the later period. It cannot be transferred to another Taxable Person. Amounts disallowed under Article 31 or on arm’s length pricing grounds under Article 34 cannot be carried forward at all.
Can a free zone company earn Qualifying Income by lending to its individual shareholder?
No. Under Ministerial Decision No. 229 of 2025, any transaction with a natural person is an Excluded Activity, apart from transactions relating to ships, fund management, wealth and investment management, and aircraft financing and leasing. The interest is non-qualifying revenue and counts against the de minimis limit of the lower of AED 5,000,000 or 5% of total Revenue.
What are the transfer pricing documentation thresholds for intercompany loans?
Ministerial Decision No. 97 of 2023 requires a Master File and a Local File where Revenue in the Tax Period is AED 200 million or more, or where the entity belongs to a multinational group with total consolidated revenue of AED 3.15 billion or more. Below both thresholds the files are not required, but the Arm’s Length Principle still applies to every related-party transaction.
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