Article 30- General Interest Deduction Limitation Rule

 

Scenario 1: M/s XYZ ltd. has Profit & Loss A/c details for the tax period as under:

Particulars Amount in AED
Taxable Income (Includes interest income of AED 5,00,000) 25,00,000
Exempt Income 15,00,000
Total Income 40,00,000
Cost of goods sold/services 21,00,000
Interest 6,50,000
Depreciation 5,50,000
Total Expenditure 33,00,000
Profit & Loss before tax 7,00,000
Tax (29,250)
Profit after tax 6,70,750

Calculation of disallowance of interest expenditure under Article 30:

General Interest deduction shall be lower of the following:

  1. Net Interest Expenditure
  2. 30 % of EBITDA excluding the exempt income

Limit 1: Calculation of net interest expenditure

Interest expenditure incurred (current tax period) – Taxable interest income

Therefore, AED 1,50,000 (6,50,000 – 5,00,000) is net interest expenditure.

Limit 2:

Calculation of EBITDA excluding exempt income

Particulars Amount in AED
Profit after tax 6,70,750
Add: Tax Amount 29,250
Add: Interest 6,50,000
Add: Depreciation 5,50,000
19,00,000
Less: Exempt Income 15,00,000
EBITDA excluding exempt income 4,00,000

Now, 30% of EBITDA excluding exempt income shall be 4,00,000*30% = AED 1,20,000.

Therefore, deductible interest expenditure for current tax period lower of the above i.e., AED 1,20,000 & Interest expenditure to be carried in subsequent tax periods shall be AED 30,000 (1,50,000 – 1,20,000).

Scenario 2: In case there is carry forward interest expenditure disallowed in previous tax periods amounting to AED 20,000, disallowance of interest in current tax period shall be calculated as follows:

Calculation of disallowance of interest expenditure under Article 30:

General Interest deduction shall be lower of the following:

  1. Net Interest Expenditure
  2. 30 % of EBITDA excluding the exempt income

Limit 1Calculation of net interest expenditure

Interest expenditure incurred (current tax period) + carry forward (previous tax periods) – Taxable interest income

=> AED 6,50,000 + AED 20,000 – AED 5,00,000

=> AED 1,70,000 will be net interest expenditure.

Limit 2: Taken from above case scenario i.e., AED 1,20,000

Therefore, interest expenditure to be carried forward subsequent tax period shall be AED 50,000 (1,70,000 -1,20,000).

Scenario 3: M/s ABC ltd. has Profit & Loss A/c details for the tax period as under:

Particulars Amount in AED
Taxable Income (Includes interest income of AED 4,90,000) 25,00,000
Exempt Income 15,00,000
Total Income 40,00,000
Cost of goods sold/services 18,00,000
Interest 6,50,000
Depreciation 5,50,000
Total Expenditure 30,00,000
Profit & Loss before tax 10,00,000
Tax (56,250)
Profit after tax 9,43,750

Calculation of disallowance of interest expenditure under Article 30:

General Interest deduction shall be lower of the following:

  1. Net Interest Expenditure
  2. 30 % of EBITDA excluding the exempt income

Limit 1: Calculation of net interest expenditure

Interest expenditure incurred (current tax period) – Taxable interest income

Therefore, AED 1,60,000 (6,50,000 – 4,90,000) is net interest expenditure.

Limit 2:

Calculation of EBITDA excluding exempt income

Particulars Amount in AED
Profit after tax 9,43,750
Add: Tax Amount 56,250
Add: Interest 6,50,000
Add: Depreciation 5,50,000
22,00,000
Less: Exempt Income 15,00,000
EBITDA excluding exempt income 7,00,000

Now, 30% of EBITDA excluding exempt income shall be 7,00,000*30% = AED 2,10,000

Therefore, deductible interest expenditure for current tax period shall be AED 1,60,000 & no interest expenditure shall be carried forward in subsequent tax periods.

Scenario 4:

Relevant Provision: Article 30 (Clause 4)

The amount of Net Interest Expenditure disallowed under Clause 1 of this Article may be carried forward and deducted in the subsequent (10) ten Tax Periods in the order in which the amount was incurred, subject to Clauses 1 and 2 of this Article.

Year EBITDA Max Limit* Net Interest Exp C/f(PY) Int Exp Allowed** C/f(Next year)
1 1,00,000 30,000 35,000 30,000 5,000
2 1,50,000 45,000 35,000 5,000 40,000
3 1,20,000 36,000 35,000 35,000
4 1,15,000 34,500 35,000 34,500 500
5 1,10,000 33,000 35,000 500 33,000 2,500
6 1,15,000 34,500 30,000 2,500 32,500
7 (90,000) (27,000) 30,000 30,000
8 (50,000) (15,000) 30,000 30,000 60,000
9 (20,000) (6,000) 30,000 60,000 90,000
10 1,00,000 30,000 30,000 90,000 30,000
11 5,00,000 1,50,000 30,000 30,000

* Max Limit : 30% of EBITDA

** Interest Expense Allowed = Lower of Max limit & (Net Interest Expense & Carry forward from PY)

Net Interest expense is reduced in year 6 by AED 5,000 as there was a repayment of loan at the end of year 5.

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