Why does funding your company with debt (instead of equity) raise a tax flag?

'Thin capitalization' describes a situation where a company relies excessively on loans and debt — often from a related party, such as a parent company or the owner themselves — instead of being funded through real equity. The tax problem isn't the debt itself; debt is a perfectly normal, legitimate funding tool. The issue is that interest expense on that debt is deductible against taxable profit, unlike dividends paid to shareholders, which get no tax deduction at all. So the more a company is funded with debt, the more it can shrink its taxable profit through interest — sometimes artificially inflated interest — without any real change to its underlying business.

That's why Article 30 of the UAE Corporate Tax Law places a general cap on the deduction of net interest expense: no more than 30% of adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) can be deducted in a given year. Interest expense above that cap can't be deducted that year, but can be carried forward and deducted in future years, for up to 10 years. There's also a de minimis threshold of AED 12 million in net interest expense — if a company's net interest is below that, the rule doesn't apply to it at all.

The point to actually understand, beyond memorizing the number, is that this rule isn't a penalty on borrowing — it's a tool to stop companies from using loans, particularly from related parties, to artificially strip out taxable profit. If your company genuinely needs financing for real expansion, that's normal and expected. But if a financing structure is built primarily to reduce tax, that's exactly what Article 30 is designed to put under scrutiny.

At RASEEKH, we help businesses financed by a related party review their debt structure early, and confirm their deductible interest ratio lines up with the legal cap — instead of being caught off guard by a portion of their interest being disallowed when the return is filed.