For corporate tax purposes, businesses are allowed to offset losses incurred in one tax period against the taxable income of a subsequent tax period, ensuring consistent taxation regardless of profit fluctuations. This provision aims to maintain the same amount of corporate tax paid by a business throughout its lifetime, regardless of when profits and losses are generated. As per the Corporate Tax Law, Tax Losses, defined as negative Taxable Income computed under Article 20, can be deducted and used to reduce the Taxable Income of a Taxable Person in future tax periods. A Tax Loss occurs when a taxable person’s expenditure exceeds their generated revenue in a given tax period. Therefore, Taxable Persons are advised to seek the expert services of Tax Consultants in UAE to effectively determine Tax Loss Relief in compliance with the Corporate Tax Law.
Whereas, if a taxable person incurs a Tax Loss in a specific tax period, they can carry forward and utilize these accumulated losses to reduce the taxable income earned in subsequent tax periods. The Corporate Tax Law stipulates a limit on the amount of Tax Losses that can be used to reduce taxable income in each tax period. This limit is set at 75% of the taxable income before applying for any Tax Loss relief. For instance, if the taxable income in a tax period is AED 1,000,000, the maximum Tax Losses that can be utilized cannot exceed AED 750,000, which is 75% of AED 1,000,000.
The aforementioned clause also grants the Cabinet the authority to determine an alternative percentage for the Tax Loss limitation and specify circumstances in which Tax Losses exceeding the 75% threshold can be used to reduce taxable income in subsequent tax periods. Additionally, certain types of losses, which do not represent economic losses for corporate tax purposes, cannot be considered Tax Losses under the Corporate Tax Law.
The Corporate Tax statute also addresses the situation where a taxable person is unable to fully utilize their available Tax Losses in the following tax period. In such cases, the unused Tax Losses can be carried forward to future tax periods until they are fully utilized. Further, if there are Tax Losses carried forward from previous tax periods, these losses must be used to offset the taxable income of the taxable person first, before any excess amount can be utilized by other group companies.
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The Transfer of tax losses between Resident Persons with a minimum common ownership of 75% is permitted according to this provision. It applies to both current tax losses and those carried forward from previous tax periods. Similar regulations are in place in various jurisdictions to ensure that corporate tax is applied to the entire economic unit generating taxable income.
Utilization of tax losses among taxable persons is allowed with substantial common ownership. While the tax group provisions require 95% or more common ownership, the regulations in this article enable the transfer of tax losses when there is at least a 75% common ownership. To establish a close relationship between two taxable persons, enabling the transfer of tax losses from one to another, the conditions are similar to some extent, to those defining a qualifying group. However, it should be noted that Article 38 does not cover UAE permanent establishments of non-resident persons.
The Corporate Tax Law stipulates that the common ownership of at least 75% must be maintained from the beginning of the tax period in which the tax loss is incurred until the end of the tax period in which the receiving taxable person offsets the transferred tax loss against their taxable income.
The receiving taxable person may deduct the transferred tax losses from their taxable income for the relevant tax period. A single taxable person can transfer their tax losses to multiple taxable persons, as long as the relationship between the transferor and each recipient meets the conditions specified in the Corporate Tax Law.
The total amount of tax loss offset utilized by the receiving taxable person must not exceed the 75% limit. If a single taxable person transfers tax losses to multiple recipients, this threshold applies separately to each recipient based on their taxable income (prior to any tax loss relief) in the relevant tax period. Whereas, the taxable person transferring tax losses must reduce their available tax losses by the amount transferred. For example, if a taxable person (Person One) has available tax losses amounting to AED 1,000,000 and transfers AED 200,000 of these losses to another taxable person, Person One’s remaining available tax losses would be AED 800,000 (AED 1,000,000 minus AED 200,000) to offset against their own taxable income in future tax periods.
Taxable Persons are advised to seek the expert services of Tax Consultants in UAE to effectively determine Tax Loss Relief in compliance with the Corporate Tax Law. Thus, contact us today and we shall be glad to assist you.
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