UAE Corporate Tax Law: Can you use the total amount of interest paid to determine your taxable profit?
Companies have access to a variety of funding options, and debt finance is one of them. Debt financing can take many different forms, including overdrafts, preference shares, and regular loans from financial institutions. The cost of debt financing, also known as interest, is typically less expensive than the cost of equity. The interest payments are seen as a business expense when borrowed money is used for commercial reasons, which reduces the accounting earnings. If allowed by tax authorities, interest payments can lower taxable profits, resulting in tax savings, as corporate tax is assessed on taxable profits, which are determined after reducing.
A taxable individual can choose to take on more debt because the cost of debt is cheaper than the cost of equity, therefore they don’t need to think about the best capital structure. To move their profits from a high tax jurisdiction to a low or no tax jurisdiction, taxable individuals can take out large loans from relatives in tax-free countries and zones with lower taxes. [Read more…]