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Treatment To Tax Losses under UAE Corporate Tax

Tax losses are a critical element for businesses aiming to optimize their financial standing. When a Taxable Person incurs deductible expenses surpassing income subjected to Corporate Tax, it results in what is termed as Tax Loss. Tax Losses present an avenue for businesses to strategically manage their tax liabilities. In essence, Tax Losses can be utilized to offset future Taxable Income, subject to specific conditions. This mechanism ensures that the Corporate Tax paid by businesses remains consistent, irrespective of when profits or losses materialize. Moreover, Tax Losses can be employed not only to benefit the business that incurred them but also, under certain circumstances, to offset the Taxable Income of another business.

The Nature of Tax Losses

Tax Losses occur when deductible expenses exceed income subjected to Corporate Tax. This is a common occurrence in the business spheres, arising from various scenarios, such as strategic investments in growth or temporary adverse trading conditions. However, Tax Losses present not just financial setbacks but also strategic opportunities for businesses.

Strategic Management through Tax Losses

Tax Losses offer businesses the opportunity to offset future Taxable Income, ensuring consistency in Corporate Tax payments regardless of when profits or losses materialize. Moreover, these losses can be employed not only to benefit the business that incurred them but, under certain conditions, to offset the Taxable Income of another business.

Conditions and Limitations

The utilization of Tax Loss relief is subject to specific conditions and limitations. Taxable Persons can carry forward Tax Losses but are restricted to offsetting a maximum of 75% of subsequent Taxable Income. This limitation ensures the judicious application of Corporate Tax, considering the overall economic unit generating income.

Utilization and Carry-Forward Conditions

Taxable Persons must utilize available Tax Losses in the current Tax Period before carrying forward any remaining losses. Conditions dictate that if carried-forward Tax Losses amount to less than 75% of Taxable Income, they must be fully utilized in the current period, preventing selective carry-forward and promoting systematic tax liability management.

Complexities of Ownership Changes

A change in ownership introduces complexities in the context of Tax Losses. Continuous ownership of at least 50% is required for carrying forward Tax Losses after a change in ownership. However, exceptions apply when shares are listed on a Recognized Stock Exchange, showcasing the nuanced considerations based on business nature and market presence.

Strategic Transfer of Tax Losses

Transfer of Tax Losses introduces strategic financial management opportunities. Transfer between Resident juridical persons is possible under specific conditions, including a shared ownership interest of at least 75%, common Financial Year, usage of the same accounting standards, and exclusion from Exempt Person or Qualifying Free Zone Person categories.

Conditions for Valid Transfer

Qualifying common ownership conditions must be maintained throughout the Tax Period. The entity transferring Tax Losses sees a reduction, and the recipient can offset Taxable Income to a maximum of 75% for that Tax Period. This transfer isn't limited to a single scenario; Taxable Persons can distribute Tax Losses among multiple recipients.

Constraints on Extending the Use of Tax Losses

Are there any limitations on the carry-forward of tax losses? 

Under the corporate tax law, certain losses are ineligible for offset or carry-forward to future periods. These include 

  • losses incurred before the effective date of Corporate Tax (CT) related to a specific business, 
  • losses before becoming a taxpayer for UAE Corporate Tax (CT),
  • losses from activities or assets generating income exempt from UAE CT, 
  • losses incurred by Free Zone Persons not attributable to a Permanent Establishment (PE) on the mainland.

What is the Duration of Loss Carry-Forward?

Businesses have the flexibility to carry forward losses indefinitely, as outlined in the UAE Corporate Tax Public Consultation Document. 

What Are the Prerequisites for Indefinite Loss Carry-Forward?

The government has stipulated conditions for businesses seeking to carry forward losses indefinitely. Corporate tax consultants based in Dubai assist companies in determining if they can apply past losses to offset future taxable profits. Businesses meeting specific criteria can extend their losses to a subsequent tax period.

Tax Losses emerge as a pivotal element in shaping the financial landscape for businesses, providing dynamic tools for managing Corporate Tax liabilities. Whether through carrying forward losses, navigating ownership changes, or strategically transferring losses between entities, businesses can leverage Tax Losses for financial resilience and agility in an evolving regulatory environment. Understanding and adeptly utilizing Tax Loss provisions become crucial for businesses navigating the complex tax landscape.

Can businesses seek relief for losses incurred before the onset of Corporate Tax? 

Losses incurred before the business becomes subject to Corporate Tax are not considered "Tax Losses" and cannot be used or carried forward for Corporate Tax purposes.

How are Tax Losses transferred within a group determined?

To move Tax Losses from one company to another within the same Tax Period, certain steps need to be followed:

  • It is necessary for both companies to be juridical persons residing in the UAE.
  • The Tax Period when the loss occurred is the starting and ending point, where either one entity owns 75% or more of the other, or a third party owns 75% or more of both.
  • Both companies are not considered Exempt Persons or Qualifying Free Zone Persons.

Seek the Services of Tax Consultants in UAE

To effectively determine tax loss and ensure compliance with the corporate tax law, businesses are advised to seek the expert services of top Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.

Read More: Determining State Sourced Income for Corporate Tax Purposes

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.