Contact us
Business Bay, Opal tower, Office 1301, Dubai, United Arab Emirates.
Office time: 9:00 – 18:00
+ 971 58 515 7428
Contact us
Business Bay, Opal tower, Office 1301, Dubai, United Arab Emirates.
Office time: 9:00 – 18:00
+ 971 58 515 7428
In order to carry out financial activities, including the provision of financing within the territory of the UAE, it is necessary to obtain a license in accordance with Federal Decree-Law No. 14 of 2018 On the Central Bank and the Regulation of Financial Institutions and Their Activities.
However, if the issuance of loans is not conducted on a regular basis or as a business activity (by way of business), a UAE Central Bank license to conduct financial activities is not required.
Commercial loans in the UAE are primarily regulated by Federal Decree-Law No. 50 of 2022 On Commercial Transactions. This law governs the main aspects of loan provision, including:
UAE legislation establishes certain restrictions on loans between individuals and legal entities, in particular:
Additionally, there are specific regulations regarding loans granted by holding companies, as well as companies registered in free zones such as DIFC and ADGM.
UAE legislation (Corporate Tax Law) regulates the amount of interest that can be deducted as net interest expenditure. Net interest expenditure represents the difference between the total interest expense incurred (including carried-forward net interest expenditure) and the interest income received during the tax period.
1. When net interest expenditure exceeds AED 12 million for the tax period, the amount of deductible net interest expenditure is determined as the higher of the following:
This principle is known as the General Interest Deduction Limitation Rule.
2. If net interest expenditure is below the de minimis threshold of AED 12 million for the tax period, the General Interest Deduction Limitation Rule does not apply. This means that, subject to compliance with Article 30 of the Corporate Tax Law, the full amount of interest expense incurred during the tax period may be deducted.
In addition, there are separate restrictions on the deductibility of interest on loans from related parties (Art. 31 of the Corporate Tax Law).
Determining the arm’s length interest rate under a loan agreement is a requirement from a transfer pricing perspective for corporate taxation purposes in the UAE. The issue of determining an arm’s length interest rate for transfer pricing purposes requires a detailed analysis using one of the methods provided by UAE legislation. As a rule, the comparable uncontrolled price method is used in financing transactions, since open-source data with third parties, such as Bloomberg, Reuters, etc., is available.
Determining the market level of the interest rate is based on the following steps:
It should be specifically noted that the credit rating of a borrower within a group of companies may be influenced by implicit support from the group. The likelihood of such support generally depends on the borrower’s position within the group structure: a company that has close ties to other group members, is significant in terms of its positioning or business strategy, or engages in a core business activity for the group is more likely to receive group support in the event of insufficient funds or other adverse circumstances — meaning its standalone credit rating may be more closely aligned with the rating assigned to the group as a whole.
Following the conducted analysis, a range of market interest rates is determined based on information on identified comparable transactions in accordance with para. 7, Art. 34 of Federal Law No. 47 of 2022, and para. 5.3.4 of the Corporate Tax Guide: Transfer Pricing Guide.
If the interest rate falls within the determined arm’s length range, it can be concluded that the agreed rate under the intragroup loan agreement complies with legislative requirements. Otherwise, if the agreed interest rate deviates from the range, the tax authority may make an adjustment to arrive at a result that best reflects the facts and circumstances of the transaction or arrangement. When adjusting the income of one party, the tax authority is required to make a corresponding adjustment to the other party in the analyzed transaction.
It should be noted that UAE legislation imposes an obligation to notify about related-party transactions as part of filing a corporate tax return when monetary thresholds are met. The pricing method used in the transaction and the arm’s length rate must be indicated.
Thresholds for transfer pricing purposes:
It should be noted that dividends payable to related parties are not taken into account when calculating the thresholds of AED 40 million or AED 4 million.
The requirement to submit transfer pricing documentation applies to:
Transactions outside the scope of control: Any information substantiating the price levels may be requested, taking into account the general anti-avoidance rule (Art. 50 of Law No. 47 of 2022).
It should be taken into account that taxable persons in the UAE are required to apply accounting standards adopted in the UAE in accordance with Ministerial Decision No. 114 of 2023 On Accounting Standards and Methods for the Purposes of Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses when preparing financial statements:
The accounting treatment of loans is governed by IFRS 9 Financial Instruments.
Loans (both issued and received) are initially recognized at fair value and subsequently, as a rule, at amortized cost using the effective interest rate method. In accordance with IFRS 9, depending on the business model for managing such financial assets, they may alternatively be measured at fair value through profit or loss or through other comprehensive income (IFRS 9 para. 4.1.2).
The amortized cost of a financial asset or financial liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization of any difference between that initial amount and the amount repayable at maturity, using the effective interest method, and adjusted for any loss allowance for expected credit losses in the case of a financial asset (Appendix A, IFRS 9).
The effective interest rate, adjusted for credit risk, is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset to the amortized cost of the financial asset (Appendix A, IFRS 9).
When loans bear interest, the accounting treatment is straightforward. Upon receipt of a loan, the full amount is recognized as a liability. As interest accrues, an interest expense and a corresponding liability are recognized. Similarly, for loans issued, the accounting treatment reflects the contractual terms of the agreement.
However, when loans are non-interest-bearing, the accounting becomes more complex. It is necessary to determine the market interest rate (on an arm’s length basis) applicable to the arrangement (see section above) and adjust both the carrying amount of the loan principal and any notional interest accrued accordingly.
Let us consider the accounting treatment of interest-free loans between related parties using the following examples.
Company A grants an interest-free loan of 1,000 currency units (CU) to its associate, Company B. The loan is repayable in a lump sum after two years.
Since the loan is interest-free, its fair value at initial recognition does not equal the nominal amount disbursed. Economically, when a company provides an interest-free loan, it incurs a loss, as it forgoes potential income that could have been earned on this investment.
It is necessary to determine the interest rate applicable to loans with similar terms provided on the open market between independent parties. In this example, we assume a market rate of 6%.
The table below shows the repayment schedule of the principal. The cash flow is discounted at the market interest rate of 6%, resulting in a present value of CU 890 at the initial recognition date.
| Date | Cash Flow | Discounted Value | Interest Income |
| 01.01.2025 | 0 | 890 | |
| 31.12.2025 | 0 | 943 | 53 |
| 31.12.2026 | 1,000 | 1,000 | 57 |
At the time of initial recognition, there is a day-one loss — the difference between the disbursed cash amount and its fair value. In this example, the difference is CU 110 (CU 1,000 – CU 890).
The following journal entries are recognized at initial recognition:
| Dr Loans issued | CU 1,000 |
| Cr Cash | CU 1,000 |
| Dr Loss on initial recognition of loan (P&L) | CU 110 |
| Cr Loans issued | CU 110 |
Subsequently, over the two-year period, CU 110 will gradually be recognized as interest income in Company A’s profit or loss:
| Dr Loans issued |
| Cr Interest income (P&L) |
By the loan repayment date in 2026, the carrying amount of the loan will equal its nominal amount of CU 1,000.
From an economic perspective, upon receipt of an interest-free loan, Company B receives an economic benefit — it avoids incurring interest expense it would otherwise have borne under third-party financing.
Therefore, similarly to Company A, Company B must apply a market interest rate to determine the fair value of the loan in accordance with IFRS.
The loan measurement will mirror that of Company A. The journal entries will be symmetrical:
| Dr Cash | CU 1,000 |
| Cr Loans received | CU 1,000 |
| Dr Loans received | CU 110 |
| Cr Gain on initial recognition of loan (P&L) | CU 110 |
Over the two-year period, CU 110 will gradually be recognized as interest expense in Company B’s profit or loss.
Company A is the parent of Company B. The loan agreement terms are identical to those in Example 1.
The loan measurement under IFRS for both Company A and Company B will be identical to Example 1.
However, when transactions are conducted with owners (whether legal entities or individuals), IFRS introduces an important distinction in accounting treatment.
In accordance with the IFRS Conceptual Framework and IAS 1 Presentation of Financial Statements, transactions with owners acting in their capacity as owners are recognized directly in equity and do not affect profit or loss. A shareholder, when granting an interest-free loan, does not act on arm’s length terms — they have a direct interest in the company’s operations and do not expect a direct return as an independent market participant would. This transaction is treated as a form of capital contribution to the subsidiary in the form of a benefit (interest concession). Therefore, it is recognized directly in equity.
Accordingly, at initial recognition:
Company A will recognize the day-one effect as an increase in investment in Company B:
| Dr Investment in Company B | CU 110 |
| Cr Loans issued | CU 110 |
Company B will recognize the effect as an owner contribution within equity:
| Dr Loans received | CU 110 |
| Cr Other transactions with owners (equity) | CU 110 |
Interest income and expense in subsequent reporting periods will be recognized in the normal course within profit or loss.
