The UAE Federal Tax Authority has clarified in Corporate Tax Public Clarification CTP012 that banks cannot deduct payments made on Additional Tier 1 instruments unless those payments are included in Accounting Income as prepared under IFRS.
The UAE Federal Tax Authority (FTA) has issued Corporate Tax Public Clarification CTP012, addressing the Corporate Tax treatment of payments made by banks on Additional Tier 1 (AT1) instruments.
The clarification explains whether such payments are deductible when determining a bank’s Taxable Income and provides guidance on the applicable tax treatment.
Issue
Banks operating in the UAE are subject to minimum regulatory capital requirements in accordance with applicable regulations in the UAE, or of a foreign jurisdiction where the relevant laws and regulations are substantially aligned with the Basel III framework. One element of regulatory capital is Additional Tier 1 capital. Instruments that a bank issues to meet certain minimum regulatory capital criteria may be included in Additional Tier 1 capital. These instruments are referred to as “AT1 Instruments” in this public clarification.
The purpose of this Public Clarification is to clarify whether payments made by banks on AT1 Instruments are deductible in determining their Taxable Income.
Summary
Where payments made by banks in respect of AT1 Instruments are not included in Accounting Income, the payments are not deductible for the purposes of determining Taxable Income. The classification and tax treatment of AT1 Instruments by holders are outside the scope of this clarification.
What is an AT1 instrument?
Banks operating in the UAE are subject to minimum regulatory capital requirements in accordance with applicable regulations in the UAE, or of a foreign jurisdiction where the relevant laws and regulations are substantially aligned with the Basel III framework.
The regulatory capital of a bank includes Additional Tier 1 capital.
For an instrument issued by banks to be included in Additional Tier 1 capital, it must satisfy regulatory capital requirements. These include, but are not limited to, the following:
- The instrument is perpetual, i.e. there is no maturity date and there are no step-ups or other incentives to redeem.
- The instrument is only callable subject to meeting regulatory approval and specified conditions.
- The instrument must be subordinated to depositors, general creditors and the debt of the bank.
- The bank must have full discretion at all times to cancel any dividends/coupons.
- Dividends/coupons must be paid out of distributable items.
In accordance with regulatory capital requirements, typically distributable items are the amount of the issuer’s consolidated retained earnings and reserves after the transfer of any amounts to non-distributable reserves, as set out in the most recent audited or auditor reviewed consolidated financial statements of the issuer that correlates to the Tax Period, or any equivalent or successor term from time to time.
In this public clarification, the term “payments” refers to dividends/coupons paid on an AT1 Instrument. The term does not refer to any principal amounts that are repaid in respect of an AT1 Instrument.
Corporate Tax treatment of payments made by banks in respect of AT1 Instruments
In accordance with Article 20(1) of the Corporate Tax Law, the Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone Financial Statements prepared for financial reporting purposes in accordance with acceptable accounting standards in the UAE, i.e. IFRS or IFRS for small and medium-sized entities.
In accordance with Article 20(2) of the Corporate Tax Law, the Taxable Income for a Tax Period shall be the Accounting Income for that period, and to the extent applicable, adjusted for various listed items, including deductions.
However, a deduction for payments is not allowable where such payments are not already included in Accounting Income.
Accounting Income is defined in Article 1 of the Corporate Tax Law as the accounting net profit or loss for the relevant Tax Period as per the financial statements prepared in accordance with the provisions of Article 20 of the Corporate Tax Law.
Therefore, where a payment made by a bank in respect of an AT1 Instrument that is accounted for as equity is not included in the accounting net profit or loss as per the financial statements prepared in accordance with IFRS, the payment is not deductible in the calculation of Taxable Income.
The classification of AT1 Instruments from the holders’ perspective, and the tax treatment of payments received by holders in respect of AT1 Instruments, are not covered by this public clarification.
Example
Bank X is regulated by the Central Bank of the UAE (“CBUAE”) and prepares its Financial Statements in accordance with IFRS. In 2024, Bank X issued an instrument to meet its capital adequacy requirements. The instrument is considered to be an AT1 Instrument by CBUAE and classified as an equity instrument for accounting purposes.
In 2025, Bank X declared a dividend payment of 3%, which was made through retained earnings.
The dividend payment is not included in the accounting net profit or loss for the 2025 Tax Period as per the Financial Statements of Bank X, prepared in accordance with IFRS.
Accordingly, the dividend payment is not included in Accounting Income and therefore is not deductible for the purpose of determining Taxable Income for Bank X for its 2025 Tax Period.
