What are Tax Losses and their Implications on UAE Corporate Tax?

As a business operating in the United Arab Emirates, knowledge of corporate tax, tax losses, and their implications on the aforesaid corporate tax is of the utmost importance. Through this article, we aim to shed light on corporate tax loss and its impact on businesses in the UAE, as well as the implication of tax losses on such corporate tax. 

The term "corporate tax" refers to the direct taxes levied by the government on a company's taxable income for a specific accounting period. Such a type of tax acts as an additional source of income for a government. The aim of introducing the corporate tax in the UAE is to comply with international standards and change its global image from an oil-dominated economy to a diversified one. The new tax structure is bound to come into place at the start of the next financial year, in June 2023. The corporate tax will be imposed annually on a self-assessment basis at a rate of 0% for income below AED 3,75,000 and at a rate of 9% for income exceeding AED 3,75,000.

Tax Loss and its Implication on UAE Corporate Tax

Now, one might wonder what tax losses are and how they are relevant to this new system of taxation. Tax loss provision refers to a system that allows a taxable person to carry forward their tax losses to future years and offset them against profits, thereby reducing their tax liability.

“Tax loss from the corporate tax point of view is a situation where the total deductions allowed to an entity will more than the taxable income which would gradually make it a negative taxable income”

The newly introduced corporate tax system, as explained above, takes into account tax losses incurred by taxable persons and provides provisions for the same. Such provisions are explained through Article 37, Tax Loss Relief; Article 38, Transfer of Tax Losses; and Article 39, Limitation on Tax Losses Carried Forward.

Article 37: Tax Loss Relief

According to Article 37, a tax loss can be set off against the taxable income of a subsequent period to arrive at the net taxable income.

Unless specified otherwise by the cabinet at the suggestion of the ministry, the amount of tax loss that is used to reduce the taxable income of a period cannot exceed 75% of the taxable income for that period before any tax relief or any other percentage as specified by the cabinet. The tax loss that is carried to a subsequent period is required to be set off against the taxable income of such subsequent period before carrying it forward to another subsequent period. The tax loss relief cannot be claimed by a taxable person for the following reasons:

1. Losses that were incurred by the business before the commencement of corporate tax.
2. Losses that were incurred by the business before a person was considered a taxable person by this decree-law.
3. Losses that are incurred from activities or assets that are termed to be exempt from corporate tax under this decree-law.

Eg: If a registered taxpayer has incurred a taxable income of say AED 200,000, and has carried forward a loss of 175,000. It can be set off @ 75% of 200,000 i.e. 150,000 of the loss carried forward in the relevant tax duration which would result in a decrease in taxable income to AED 50000. The amount of Tax loss that can be carried forward to next subsequent year will be (175,000-150,000) AED 25000 

Know more about Corporate Tax Deductions in Special Circumstances

Article 38: Transfer of Tax Loss

Article 38 allows a taxable person to transfer their tax loss or a portion thereof to another taxable person, given that certain requirements are met. The requirements for the same are as follows:

1. Both the taxable persons are juridical persons.
2. Both the taxable persons are residents of the UAE.
3. Either one of the taxable persons is required to have a direct or indirect ownership of not less than 75% in the other, or a third taxable person has a direct or indirect ownership of 75% in each of the taxable persons.
4. The common ownership must exist from the beginning of the tax loss period until the end of the period where the tax loss is transferred.
5. The taxable persons are not exempt.
6. The taxable persons are not qualifying free zone persons.
7. The financial years of both taxable persons end on the same date.
8. The accounting standards followed by both taxable persons are required to be the same.

Article 39: Limitation on Tax Loss Carried Forward

According to Article 39, tax losses can be carried forward and utilised only if the following conditions are met:

1. The same person is required to own at least 50% ownership interest in the taxable person from the beginning of the tax period in which the tax loss is incurred until the end of such tax period in which the tax loss is set off.
2. The taxable person is required to conduct the same or a similar business activity following a change in ownership of more than 50%.
3. As per the notification by FTA, the tax loss incurred from one Group Company of UAE can be set off from the income of another group company only if there is 75% or more common ownership between them and when all other requisites are adhered to.

This does not apply to a taxable person whose shares are listed on a recognised stock exchange.

You make also like to know more about UAE corporate tax exempted parties and excluded incomes

How can CDA assist you in filing your taxes?

Hope you got a clear understanding of tax losses and their use on UAE corporate tax. If you are looking for expert assistance in implementing corporate tax strategies for your business, look no further than Charles and Darwish Associates! Our team of experienced tax professionals is here to guide you through the complex process of corporate tax implementation, ensuring that you comply with all relevant laws and regulations while minimizing your tax burden. From tax planning to compliance and reporting, we've got you covered.

Contact us today to learn more about how our assistance helps your business thrive!