Additional Tier 1 Instruments UAE are special capital instruments that banks issue to meet the UAE Central Bank’s Basel III capital requirements. Their Corporate Tax treatment is governed by the Federal Tax Authority (FTA) Public Clarification on the Corporate Tax Treatment of AT1 Instruments, which sets out how payments made on these instruments should be treated for tax purposes.
AT1 instruments have unique features such as being perpetual, having optional coupon payments, and being able to absorb losses, which make them different from normal debt or equity. Because of these differences, the FTA issued a dedicated clarification to ensure banks apply the correct tax treatment.
This article explains the legal basis, the nature of AT1 instruments, how payments are treated under UAE Corporate Tax, and the key conditions banks must follow to stay compliant.
What Are Additional Tier 1 (AT1) Instruments in Banking?
AT1 instruments are perpetual capital instruments issued by banks to strengthen their regulatory capital under Basel III. They have no maturity date, their coupon payments are optional, and they can be written down or converted if the bank faces financial stress.
These instruments do not behave like traditional debt, which normally has fixed interest and a clear repayment schedule. They also do not behave like ordinary equity, because they are not linked to shareholder ownership. Because of these hybrid features, the tax treatment of Additional Tier 1 Instruments in Corporate Tax must follow specific rules set by the FTA to ensure payments are treated consistently across the banking sector.
Related: Corporate Tax Audit in UAE
Corporate Tax Treatment of AT1 Payments
The FTA Public Clarification confirms that payments made by banks on AT1 Instruments in UAE are treated as deductible business expenses, provided the instrument meets the regulatory definition of AT1 capital. Although AT1 instruments have equity-like characteristics, the UAE Corporate Tax regime does not treat their payments as dividends. Instead, these payments are considered part of the bank’s regulatory capital structure, which allows them to be deducted in the Corporate Tax return. This ensures banks apply a consistent tax treatment and avoid misclassifying AT1 coupon payments.
See also: Corporate Tax Consultant
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
Key Conditions for Deductibility
In practical terms, this means the instrument must:
- Be officially recognised as AT1 capital by the UAE Central Bank and issued as part of the bank’s regulatory capital structure
- Allow the bank full freedom to stop or cancel coupon payments, with no obligation to pay them later
- Have no maturity date, meaning the instrument stays in place permanently unless the bank receives regulatory approval to redeem it
- Sit below other creditors in priority, and be capable of absorbing losses if the bank’s financial position weakens
- Be issued only by a UAE-regulated bank, since AT1 tax treatment applies exclusively to licensed banking institutions
- Not include any features that push the bank to redeem it early, such as step-ups or incentives
- Allow coupon payments only from distributable profits, ensuring payments follow regulatory capital rules
- Be redeemable only with Central Bank approval, reinforcing its role as stable capital
When these conditions are met, payments fall under AT1 Payments Tax Treatment and can be deducted in the Corporate Tax return.
Also check: Corporate Tax Services in UAE
Additional Tier 1 Instruments in UAE: Corporate Tax Considerations
Banks must apply the FTA clarification consistently and keep documentation proving that the instrument meets AT1 requirements. This includes regulatory approvals, issuance terms, and evidence that coupon payments were optional and made according to the instrument’s terms.
The tax treatment applies only to banks regulated by the UAE Central Bank. Other companies issuing similar instruments cannot apply this treatment. Banks must also ensure their accounting systems classify AT1 payments correctly to avoid errors in Corporate Tax filings and ensure full compliance.
Table: Tax Treatment Overview
| Aspect | Treatment | Notes |
|---|---|---|
| Nature of AT1 instrument | Regulatory capital | Must meet Central Bank criteria |
| Coupon payments | Deductible expense | Subject to AT1 conditions |
| Classification | Not treated as dividends | Payments are not profit distributions |
| Issuer | UAE-regulated banks | Other entities cannot apply this treatment |
| Documentation | Required | Must prove AT1 qualification |
Key Compliance Considerations for Banks
Banks should ensure:
- The instrument is officially approved as AT1 capital by the UAE Central Bank
- Payment terms follow regulatory requirements and remain discretionary
- Accounting and tax teams apply the FTA clarification consistently
- All documentation is kept for FTA review, including issuance terms and payment records
- Internal controls prevent AT1 payments from being misclassified as dividends
These steps help banks stay compliant with the bank Corporate Tax UAE requirements.
Frequently Asked Questions (FAQs)
Are AT1 payments deductible for UAE Corporate Tax?
Are AT1 payments treated as dividends?
Do all entities qualify for AT1 tax treatment?
What documentation is required for AT1 tax treatment?
Does the perpetual nature of AT1 instruments affect tax treatment?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
The FTA clarification can help banks understand what they must consider, however, the real implementation requires expert assistance. Farahat & Co. supports banks with reviewing AT1 Instrument structures for Corporate Tax compliance, assessing eligibility for deductibility under the FTA clarification, preparing Corporate Tax filings that correctly reflect AT1 payments, advising on documentation, regulatory alignment, and internal controls, and ensuring consistent application of Corporate Tax Treatment of AT1 Instruments across financial and tax reporting.
Our team ensures banks apply the correct tax treatment and remain fully compliant with FTA requirements.
Contact Farahat & Co. today and avoid any misclassification or internal control obstacles.
