Carry Forward of Tax Losses under UAE Corporate Tax: Benefits and Rules to Be Kept in Mind

With the introduction of the corporate tax in UAE, there have been many revolutionary changes that have been brought about by the UAE in the business landscape. The UAE is known as one of the most business-friendly locations across the globe, it has been taking all the required steps to maintain the same position at a global level. The corporate tax regime has in itself brought many benefits for the businesses, especially for the start-ups and new entrepreneurs. The carry forward of the tax losses is one such benefit and provision that has been provided under the corporate tax regime, which most businesses are still unaware of. In this blog you can get to know about the rules and benefits of implementing the carry forward of the tax losses regime.

When Does a Tax Loss Occur?

A tax loss occurs when the deductible expenses of a business or a start-up increase over and above the taxable income. For example, if there is a UAE based start-up that, during its initial year, has invested more on research and development and marketing, resulting in an increase in deductible expenses over the taxable income, then such a situation may lead to a tax loss.

What Is the Tax Loss Carry Forward Provision?

Under the CT regime, the tax losses that have occurred in the past year can be settled by carrying them forward to future periods when the tax income is earned, but only up to 75%. If the business comes across a said amount of loss in Year 1, and it earns a said amount of taxable income in Year 2, then 75% of the prior year's loss can be set off against the current year's taxable income, and the tax would be charged only on the remaining 25%. Whereas the remaining amount of tax loss can be set off in future periods if the compliance requirements are met.

What Are The Eligibility Criteria And Rules to be Kept in Mind?

In order to get the benefit of the tax carry forward provision under the UAE corporate tax regime, the following are eligibility criteria:

• The major eligibility criterion is that the loss must be incurred after the entity has become the taxable person.
• The loss must not be incurred out of the exempt activities.
• Losses incurred before the implementation of the CT regime cannot be used for the carry-forward purposes.

Some other rules to be kept in mind:

• Indefinite carry forward timeline: The UAE provides the provision of the carrying forward of the tax losses for an indefinite period and not for a said period of time, which makes it one of the best provisions for the businesses.
• 75% Limit: The tax losses percentage that can be carried forward to offset against the taxable income of a period is set at 75%, though the rest of the amount can be used to offset in future years.
• No carry back provision: Under the UAE Corporate Tax regime there is no carry back provision.

You can also read: What Is Meant by the Tax Dispute Resolution Committee?

What Are The Benefits of the Carry Forward of Tax Losses?

There are multiple benefits that the businesses can enjoy by utilizing the carry forward of tax losses provision:

1. The businesses can reduce the tax burden and get tax relief by utilizing the past year's tax losses.
2. The businesses can ensure proper flow of cash within the businesses by utilizing this provision.
3. The businesses can also focus on core operations and can effectively improve them to increase the income by avoiding the tax burden.

For How Many Years Can the Tax Losses Be Carried Forward?

As per the UAE CT regime, there hasn’t been any specific number of years or duration stated within which the provision should be used. Hence, this is a generous approach of providing the indefinite period for carrying forward tax losses by the authorities of the UAE whereby the start-ups and the striving companies can take the benefits.

Is It Mandatory for the Businesses to Set Off the Carried Forward Tax Losses?

The short answer is yes; if any business has chosen the provision of the carrying forward of the tax losses, then it is mandatory for the business to set off those losses from any future taxable income if earned, irrespective of the income being under the CT threshold.

Situations Where the Carry Forward of the Tax Losses Will Not Be Allowed

There are many situations where the businesses will not be approved for the carrying forward of the tax losses; some of the situations would include the following:

• If any business or company is set up as a shell company or a company that doesn’t have any proper business activity
• If the tax losses are generated through any unethical ways or malpractices
• If the businesses fail to maintain the required documents and records
• If the businesses are qualified for being the exempt person, then they cannot carry forward the tax losses.
• If the businesses indulge in any of the illegal activities, then the carry forward won’t be approved.

What Are the Documents to Be Maintained to Claim the Carry Forward of Tax Losses?

Some of the major documents that are to be maintained while applying for the carry forward of tax losses would include the following:

• Financial statements that are audited
• Journals and ledgers
• Tax compliance records such as the tax return filing documents and tax computation documentation.
• Ownership-related documents
• Bank statements, etc.

Application of Carry Forward of Tax Losses for Tax Groups

If there are a group of businesses and a business pertaining to that group makes the loss, then that can be carried to other businesses of the same group and set off if the certain regulations and conditions are met as per the regime.

How can CDA’s Experts Assist You?

Understanding the tax laws and their implementation on your business might be overwhelming and time-consuming, especially in competitive markets like Dubai. In such circumstances, experts like CDA can assist you in understanding the tax laws and also in staying compliant with the tax laws. Our professionals can assist you in calculating the taxable income or losses and to ensure eligibility to take advantage of the benefits under the CT regime. The businesses can count on our tax team, who will assist you to manage your taxes.

To know more about our tax services, connect with our team now!

Mitesh Maithia

Tax Manager

Mitesh is a Tax Professional with expertise in direct, indirect, and international taxation, including transfer pricing, since 2018. Passionate about making complex tax matters simple, he shares insights to help businesses stay compliant and forward-looking.