Chapter Eleven – Tax Loss Provisions
Under the UAE Corporate Tax framework, certain deductions are permitted to ensure that the taxable base reflects the financial performance of a business.
The adjustment for tax losses enables businesses to offset losses from the current tax period to future taxable period, thereby reducing the tax payable in the subsequent years.
This chapter outlines the rules for taxable persons on how tax losses may be carried forward, the percentage limitations on usage, the criteria for transferring losses between related entities, and restrictions on tax loss relief upon changes in ownership or business activities. These provisions help businesses during losses as well as prevent misuse of loss carry-forward mechanisms.
Article 37 – Tax Loss Relief
Tax losses incurred in one period can be offset against the taxable income in future periods under certain conditions:
The tax loss arising in one tax period can be carried forward to the taxable income in subsequent tax periods and this carry-forward is applicable until the losses are fully utilised.
The carry forward of tax losses is capped at 75% of the taxable income of the subsequent period. The Cabinet may alter this percentage or define exceptions for special circumstances upon recommendation of the Minister.
The tax loss relief cannot be claimed under the following cases:
- Losses incurred prior to the commencement of the Corporate Tax regime.
- Losses incurred before a person became a taxable person under the corporate tax law in UAE.
- Losses arise from assets or activities where the income is excluded from the tax calculation or fall under the exempt category.
Tax loss should be offset against the taxable income of the earliest available future period and any remaining loss be further carried forward or transferred to the next subsequent tax period.
Article 38 – Transfer of Tax Loss
A tax loss can be transferred from one entity to another entity within the same tax group. The following are the eligibility criteria for tax loss transfer:
- Both entities must be juridical (legal) persons.
- Both must be resident persons in UAE for tax purposes.
- A direct or indirect ownership of at least 75% should exist between the two persons, or a third party must hold some level of ownership in both entities.
- The common ownership must exist continuously from the start of the tax period in which the loss incurred to the end of the tax period in which the loss is offset by the other entity.
- Both the entities may not be an Exempt Person or a Qualifying Free Zone Person.
- The financial year of both the entities must end at the same period.
- Both entities must prepare their financial statements using the same accounting standards.
- When an entity can transfer their tax loss to another entity, the following provisions are applicable:
- The receiving entity reduces its taxable income for the relevant period by the amount of transferred loss.
- The utilization of the transferred loss remains subject to the 75% cap as per the conditions mentioned in Article 37.
- The taxable person shall reduce its available carried-forward losses by the amount transferred to another taxable person for the relevant tax period.
- The receiving entity reduces its taxable income for the relevant period by the amount of transferred loss.
Article 39 – Limitations on Tax Losses Carried Forward
This article imposes additional restrictions for taxable persons to prevent inappropriate use of carried-forward losses following changes in ownership or business activities:
From the beginning of the tax period in which the loss is incurred until the period in which it is offset, the same taxable person or group of persons must have continuously held at least 50% ownership in the entity.
If there is a change in ownership by more than 50%, the taxable person must have continued the same or a similar business activity to utilise the carried-forward losses.
- The following are the factors that will determine that the taxable person conduct same or similar business activity upon the change in ownership of 50% or more:
- Continued use of some or all of the same assets after the ownership change.
- No significant changes to the core identity or business operations of the entity.
- Any changes in business activity made are a result of developing or exploiting assets, products, services, or methods that existed after the ownership change.
- Continued use of some or all of the same assets after the ownership change.
These restrictions are not applicable for entities whose shares are listed on a recognised stock exchange.
Conclusion
These tax loss provisions provide a structured framework that allows businesses to manage losses without losing the tax benefit of previous losses. Businesses operating in the UAE should periodically review their tax positions and tax group structures to assess that carried-forward losses remain valid and can be used in future tax periods.
It is crucial for businesses to maintain clear records of losses incurred, ownership structures, and business operations to stay compliant with corporate tax regulations. Consult with FTA-approved tax agents for expert tax advice like KGRN Chartered Accountants and they will help you maximise the benefit of loss relief in compliance with the corporate tax law.
