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Interest-free loan to a minority shareholder in the UAE: really no adjustment?

At first sight, the question seems almost rhetorical: if a UAE company grants an interest-free loan to its shareholder, surely the transaction is non-arm’s length and must trigger a tax adjustment?

However, once we examine the UAE Corporate Tax framework, the answer becomes more nuanced and highly dependent on the legal status of the borrower (Related vs Connected), the accounting treatment under IFRS 9, and the structure of the Corporate Tax Return itself.

In practice, the issue is not whether the transaction is economically non-market. The real question is: which provision of law actually requires an adjustment and how?

Facts

  • A UAE company grants a long-term interest-free loan to an individual shareholder.
  • The shareholder holds less than 50% of the shares.
  • The loan is granted for a defined contractual term.

Questions

  1. How should this transaction be disclosed in the UAE Corporate Tax Return?
  2. Are any transfer pricing adjustments required in connection with the interest-free loan?
  3. Does Article 34 of the Corporate Tax Law require an arm’s length correction in this scenario?
  4. Can the loan be treated as a ‘benefit provided’ to a Connected Person under Article 36?
  5. Does the application of IFRS 9 automatically resolve the non-market element of the transaction for Corporate Tax purposes?

Summary

Based on the analysis below, we conclude that:

  1. If the shareholder is a Related Party (joint ownership >50% with his Related Parties, or control) an arm’s length correction is required if the accounting does not already reflect a market outcome.
  2. If the shareholder qualifies only as a Connected Person, an interest-free loan does not affect the company’s deductible expenses. Article 36 operates as a limitation on deductions and does not, by itself, create deemed income where no expense has been incurred. The transaction should still be disclosed as a Connected Person transaction (if the transaction value is above AED 500,000). However, the disclosure fields are structured around payments or benefits recorded in the financial statements, which an interest-free loan does not naturally generate. A defensible approach based on a strict reading of the Law can be therefore to disclose the principal amount without making a tax adjustment.
  3. If IFRS 9 is properly applied to a long-term loan with a fixed term, finance income will arise over time and automatically form part of the tax base.
  4. If IFRS 9 has not been applied and the loan has been recognised at nominal value without finance income, the potential tax implications again depend on the legal classification of the shareholder. In a Related Party context, the absence of market-aligned accounting income may prompt consideration of an arm’s length adjustment under Article 34. In a Connected-only scenario, the analysis is more nuanced and may involve evaluating whether any adjustment is warranted outside the formal transfer pricing framework.

Analysis

1. Article 34 of the Corporate Tax Law introduces the Arm’s Length Principle for transactions between Related Parties. The shareholder with ownership of less than 50% can still be treated as Related if (i) the shareholder together with persons that are related to them exceeds the ownership threshold of 50%, or (ii) the shareholder exercises control over the company.

If the shareholder is a Related Party, the arm’s length requirement is not optional. In a straightforward interest-free loan scenario where accounting reflects no finance income, the arm’s length outcome would typically imply market interest income, creating an upward transfer pricing adjustment.

2. If the shareholder is not a Related Party, but only a Connected Person the applicable legal framework is different. Article 36 provides that a ‘payment or benefit’ to a Connected Person is deductible only if it corresponds to market value and is incurred wholly and exclusively for business purposes. Crucially, Article 36 is drafted as a kind of deductibility rule. An interest-free loan does not generate an interest expense and does not involve a deduction. Article 34 of the Corporate Tax Law extends the arm’s length requirement only to transactions with Related Parties. On a strict reading of the legislation, this principle does not operate as a standalone arm’s length regime for all Connected Person transactions. This interpretation is also supported by section 3.2.5 of the FTA Free Zone Persons Guide.

This is precisely where the design of the tax return creates a technical tension. The return includes threshold questions framed around ‘transactions with Connected Persons’, effectively requiring disclosure even where the detailed fields are structured around ‘payments or benefits’ and require amounts ‘as recorded in the Financial Statements’. Hypothetical market interest is not ‘recorded’ if it has not been accrued in the accounts. As a result, attempting to insert imputed market interest into the Connected Persons schedule may create an internal inconsistency: the form is structured around expenses, whereas an interest-free loan is primarily a balance-sheet transaction.

In this context, a defensible approach may be to disclose the principal amount of the loan without making a tax adjustment.

3. Accounting can materially change the tax picture. IFRS 9 requires financial assets to be initially measured at fair value. Where an interest-free loan has a defined term and the time value of money is material, fair value is typically determined by discounting future cash flows at a market rate (IFRS 9 B5.1.1). In shareholder situations, the difference between nominal value and discounted value may be treated as an equity distribution at inception, but the effective interest method then produces finance income recognised in profit or loss over the life of the loan. Since UAE Corporate Tax starts from accounting profit, this finance income would flow into the taxable base without a separate transfer pricing adjustment, and the transaction’s ‘non-market’ element becomes reflected through accounting income recognition rather than through a standalone tax adjustment.

This point is intentionally fact-sensitive. Demand loans, short-term arrangements, or situations where discounting is immaterial may yield a different accounting outcome and therefore a different tax profile.

4. If the loan is carried at nominal value with no finance income recognised, the accounting issue is clear, but the tax consequence depends on the statutory trigger. Where Related Party status exists, Article 34 provides a direct legal basis for an arm’s length adjustment. Where the shareholder is only a Connected Person, the Corporate Tax Law does not contain an explicit provision mandating deemed interest income in the absence of a deduction. In practice, some taxpayers may consider a conservative position by making an adjustment in the ‘Other adjustments’ section to reflect IFRS-consistent income, but that is not the same as an Article 34 transfer pricing adjustment and should be approached carefully to avoid creating mismatches with the ‘as recorded in the financial statements’ logic of the Connected Persons schedule.

Conclusion

An interest-free loan to a minority shareholder in the UAE does not automatically trigger a transfer pricing correction. But nor is it a ‘simple’ issue. The correct answer depends on a structured legal and accounting analysis – starting with Related Party status, continuing through Article 34 and Article 36, and concluding with a technical IFRS 9 assessment. In practice, what appears to be a straightforward non-market transaction can sit at the intersection of corporate tax law, transfer pricing, and financial reporting.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.