Under UAE Corporate Tax, a Tax Loss arises when a business has deductible expenses that exceed its income subject to Corporate Tax during a Tax Period. In simple terms, it means the company has negative Taxable Income after making the required adjustments under the Corporate Tax Law.

What Is Not Considered a Tax Loss?

Not every accounting loss can be treated as a Tax Loss for Corporate Tax purposes.

The following losses cannot be treated as Tax Losses:

• Losses incurred before UAE Corporate Tax came into effect on 1 June 2023.
• Losses incurred before a person became a Taxable Person under the Corporate Tax Law.
• Losses from activities that do not generate Taxable Income, such as losses linked to Exempt Income.

This means pre-Corporate Tax losses cannot be carried forward and used against Taxable Income of future Tax Periods.

Relief Available for Tax Losses

A Taxable Person may carry forward Tax Losses and offset them against its own future Taxable Income. In certain cases, Tax Losses may also be transferred to another Taxable Person and used against that person’s Taxable Income, subject to specific conditions.

Carry Forward of Tax Losses

If a Tax Loss cannot be fully used in the same Tax Period, the unused balance can be carried forward to future Tax Periods.

A Taxable Person can carry forward its own Tax Losses indefinitely. These losses may be used to reduce future Taxable Income and therefore reduce the Corporate Tax payable when the business becomes profitable.

However, the amount of Tax Losses that can be offset in a future Tax Period is limited to 75% of the Taxable Income of that Tax Period before applying Tax Loss relief. The oldest Tax Losses must be used before newer Tax Losses.

Example of Tax Loss Relief

Assume a company has:

• Taxable Income before Tax Loss relief: AED 1,000,000
• Tax Losses carried forward: AED 3,000,000

The company must offset AED 750,000, being 75% of AED 1,000,000.

After offset:

• Taxable Income becomes AED 250,000.
• Remaining Tax Losses carried forward become AED 2,250,000.

The company cannot choose to offset a lower amount in order to carry forward a higher balance of Tax Losses.

Use of Own Losses Before Transferred Losses

A Taxable Person must first use its own carried forward Tax Losses before using any transferred Tax Losses received from another Taxable Person.

Similarly, a Taxable Person must fully utilise its own carried forward Tax Losses before transferring any remaining Tax Losses to another Taxable Person for a specific Tax Period.

Limitation Due to Change in Ownership

The carry forward and use of Tax Losses may be restricted where there is a change in ownership of more than 50% in a Taxable Person.

This change is assessed by comparing the ownership interests at the beginning of the Tax Period in which the Tax Loss arose and at the end of the Tax Period in which the Tax Loss is fully or partially used.

Where ownership changes by more than 50%, the Tax Loss can be carried forward only if the Taxable Person continues to conduct the same or a similar Business or Business Activity. The nature of the business activities should remain substantially unchanged.

When assessing whether the same or similar business is continued, factors may include:

• Whether the business continues to use the same assets.
• Whether there are no significant changes to the core identity or operations.
• Whether any changes are linked to the development or use of assets, services, processes, products or methods that existed before the ownership change.

This ownership-change limitation does not apply to a Taxable Person whose shares are listed on a Recognised Stock Exchange.

When Are Tax Losses Forfeited?

Tax Losses may be forfeited in certain cases, including:

• Where the Taxable Person changes its Business or Business Activity after a change in ownership of more than 50%.
• Where the Taxable Person deregisters for Corporate Tax.

Conditions for Transfer of Tax Losses

Tax Losses may be transferred from one Taxable Person to another only if the required conditions are met.

1. Both Persons Must Be Juridical Persons

Both Taxable Persons must be juridical persons, such as LLCs. Tax Losses cannot be transferred to or from a natural person, even if the natural person is subject to Corporate Tax.

2. Both Persons Must Be Resident Persons

Both Taxable Persons must be Resident Persons. Tax Losses cannot be transferred to or from a Non-Resident Person, even if that Non-Resident Person is subject to UAE Corporate Tax, such as a UAE Permanent Establishment of a foreign company.

3. 75% Ownership Condition Must Be Met

One Taxable Person must own at least 75% of the ownership interests of the other, or a third person must own at least 75% of each Taxable Person, directly or indirectly.

This condition must be met from the start of the Tax Period in which the Tax Loss was incurred until the end of the Tax Period in which the Tax Loss is offset by the recipient Taxable Person.

4. Neither Person Must Be an Exempt Person

Tax Losses cannot be transferred if either person is an Exempt Person from Corporate Tax.

5. Neither Person Must Be a Qualifying Free Zone Person

Tax Losses cannot be transferred where either person is a Qualifying Free Zone Person, even if that person has Taxable Income subject to the 9% Corporate Tax rate.

6. Both Must Have the Same Financial Year End

The Financial Year of both Taxable Persons must end on the same date.

7. Both Must Use the Same Accounting Standards

Both Taxable Persons must use the same accounting standards in preparing their Financial Statements, such as IFRS or IFRS for SMEs. This ensures that accounting losses and income are computed on a comparable basis.

How Much Tax Loss Can Be Transferred?

If all conditions are met, a Tax Loss can be offset against the Taxable Income of another Taxable Person.

The Taxable Persons may choose the amount of Tax Loss to transfer. It does not have to be the maximum possible amount.

However, the total Tax Loss offset from all sources, including transferred Tax Losses and the recipient’s own carried forward Tax Losses, cannot exceed 75% of the Taxable Income of the Taxable Person using the losses in that Tax Period.

There is no limit on the number of Taxable Persons to which Tax Losses can be transferred, provided the conditions are met.

The Tax Losses available for transfer may include unused Tax Losses of the current Tax Period or Tax Losses carried forward from previous Tax Periods.

Impact of Small Business Relief on Tax Losses

When a Resident Taxable Person elects for Small Business Relief in a Tax Period, it is treated as having no Taxable Income. Therefore, no Tax Loss can arise in that Tax Period.

Tax Losses carried forward from Tax Periods where Small Business Relief did not apply cannot be used or transferred in a Tax Period where Small Business Relief is applied.

However, those Tax Losses may continue to be carried forward and used in future Tax Periods when Small Business Relief does not apply, or transferred to another Taxable Person, subject to the required conditions.

Conclusion

Tax Loss relief can be useful for businesses that incur losses in one Tax Period and generate taxable profits in future periods. However, the use and transfer of Tax Losses are subject to important restrictions, including the 75% utilisation limit, ownership continuity rules, transfer conditions, and the impact of Small Business Relief.

Businesses should review their Tax Loss position carefully before filing their Corporate Tax return, especially where there are carried forward losses, ownership changes, group companies, or Small Business Relief elections.

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