Tax Loss Relief under Corporate Tax

Tax Loss Relief

Relevant Article: Article 37 of the Decree Law

Tax loss refers to a situation in which a taxpayer's deductible expenses or allowable losses exceed the total taxable income in a given tax period. In such cases, the taxpayer may not have to pay taxes for that period, but they may be able to carry forward the losses to offset future taxable income.

Tax loss relief refers to the provision that allows taxpayers to offset their current or future taxable income with the tax losses incurred in previous or future years, subject to certain limitations and conditions. This relief is designed to help taxpayers who have experienced losses in a particular tax period by reducing their overall tax liability, thereby providing them with some financial relief.

Clauses of Article 37 is reproduced below:

1. A Tax Loss can be offset against the Taxable Income of subsequent Tax Periods to arrive at the Taxable Income for those subsequent Tax Periods.
2. The amount of Tax Loss used to reduce the Taxable Income for any subsequent Tax Period cannot exceed 75% (seventy-five percent) or any other percentage as specified in a decision issued by the Cabinet at the suggestion of the Minister of the Taxable Income for that Tax Period before any Tax Loss relief, except in circumstances that may be prescribed in a decision issued by the Cabinet at the suggestion of the Minister.
3. A Taxable Person cannot claim Tax Loss relief for:
a) Losses incurred before the date of commencement of Corporate Tax.
b) Losses incurred before a Person becomes a Taxable Person under this Decree-Law.
c) Losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under this Decree-Law.
4. A Tax Loss carried forward to a subsequent Tax Period must be set off against the Taxable Income of that subsequent Tax Period, before any remainder can be carried forward to a further subsequent Tax Period, or any Tax Loss transferred under Article 38 of this Decree-Law can be utilised.

Analysis

Offset of tax Loss

A Tax Loss can be offset against the Taxable Income of subsequent Tax Periods to arrive at the Taxable Income for those subsequent Tax Periods.

Let's say a company had a Taxable Income of AED 1,000,000 in 2023 and paid corporate tax at a rate of 9%, resulting in a tax liability of AED 90,000.
In 2024, the company suffered a loss of AED 500,000. This means that the Taxable Income for 2024 is negative AED 500,000, and therefore no tax liability arises for that year.
However, the company can carry forward this loss to future years and offset it against the Taxable Income of those years.
In 2025, the company has a Taxable Income of AED 1,500,000. The company can use the carried forward loss of AED 500,000 from 2023 to offset against this income. This means that the Taxable Income for 2024 is reduced to AED 1,000,000, resulting in a tax liability of AED 90,000.
So, the company was able to offset the loss of AED 500,000 from 2023 against the Taxable Income of 2024, which resulted in a lower tax liability for that year. This is an example of tax loss relief.

Maximum set off allowed

The amount of Tax Loss used to reduce the Taxable Income for any subsequent Tax Period cannot exceed 75% (seventy-five percent) or any other percentage as specified in a decision issued by the Cabinet at the suggestion of the Minister of the Taxable Income for that Tax Period before any Tax Loss relief, except in circumstances that may be prescribed in a decision issued by the Cabinet at the suggestion of the Minister.
Let's assume a company has a Taxable Income of AED 1,000,000 for the year 2023 and has a Tax Loss of AED 500,000 from the year 2022.
According to the clause mentioned, the company can use the Tax Loss of AED 500,000 to reduce its Taxable Income for 2023. However, the Tax Loss used to reduce the Taxable Income for 2023 cannot exceed 75% of AED 1,000,000, which is AED 750,000.
So, in this case, the company can use AED 500,000 Tax Loss to reduce its Taxable Income for 2023, which will be calculated as follows:
Taxable Income for 2023 before Tax Loss relief: AED 1,000,000
Tax Loss relief: AED 500,000
Taxable Income for 2023 after Tax Loss relief: AED 500,000
Therefore, the company's Taxable Income for 2023 will be AED 500,000 after using the Tax Loss of AED 500,000, which is below the limit of 75% of AED 1,000,000.

When Tax Loss relief not Available?

a) Losses incurred before the date of commencement of Corporate Tax:
Suppose a company started its operations in 2022 and incurred losses of AED 100,000 in that year. However, the Corporate Tax law came into effect from 1st June 2023. In this case, the company cannot claim tax loss relief for the losses incurred in 2022 as they were incurred before the commencement of Corporate Tax.

b) Losses incurred before a Person becomes a Taxable Person under this Decree-Law:
Suppose an individual was operating a business as a sole proprietorship (his turnover was below AED 1 million) and was not liable to pay corporate tax. However, in 2024, the individual becomes a taxable person under the Corporate Tax law. If the business incurred losses of AED 50,000 before becoming liable to Corporate Tax, the individual cannot claim tax loss relief for those losses as they were incurred before becoming a taxable person under the Corporate Tax law.

c) Losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under this Decree-Law:
Suppose a company has two divisions: Division A and Division B. The income from Division A is exempt from Corporate Tax, while Division B is subject to Corporate Tax. If the company incurs losses of AED 200,000 from Division A and losses of AED 100,000 from Division B, the company cannot claim tax loss relief for the losses incurred from Division A as the income from that division is exempt from Corporate Tax. The company can only claim tax loss relief for the losses incurred from Division B.

Order of utilising Tax Loss Carried Forward

If a taxable person incurs a tax loss in one tax period, they are allowed to carry forward that loss and use it to offset against the taxable income of a future tax period. However, before using any remaining tax loss in subsequent periods, the taxable person must first use the carried-forward tax loss to offset against the taxable income of the next tax period.
For example, suppose a taxable person incurs a tax loss of AED 100,000 in Year 1. In Year 2, the taxable person has a taxable income of AED 200,000. The taxable person can use the carried-forward tax loss from Year 1 to offset against the taxable income in Year 2. So, the taxable income of Year 2 would be reduced to AED 100,000 (AED 200,000 - AED 100,000). If there is any tax loss remaining from Year 1, the taxable person can carry it forward to Year 3, but the taxable person must first use any remaining tax loss to offset against the taxable income of Year 2 before carrying forward to Year 3.

Limitation on Tax Losses Carried Forward

When a Taxable Person other than a Taxable Person whose shares are listed in a recognized Stock Exchange incurs a Tax Loss, it can only carry it forward and utilise it in accordance with the provisions of Clause 2 of Article 37 of the UAE Corporate Tax Decree-Law, subject to the following conditions:

a) From the beginning of the Tax Period in which the Tax Loss is incurred to the end of the Tax Period in which the Tax Loss or part thereof is offset against Taxable Income of that period, the same Person or Persons continuously owned at least a 50% (fifty percent) ownership interest in the Taxable Person:
This means that the Tax Loss can only be carried forward and utilised if there is continuity of ownership of at least 50% in the Taxable Person from the period in which the Tax Loss was incurred to the period in which the Tax Loss is offset against taxable income. For example, if Company A incurs a Tax Loss in 2023 and wants to offset it against taxable income in 2025, Company A must ensure that there is continuity of ownership of at least 50% during this period.

b) The Taxable Person continued to conduct the same or a similar Business or Business Activity following a change in ownership of more than 50% (fifty percent):
This means that the Tax Loss can only be carried forward and utilised if the Taxable Person continues to conduct the same or a similar business or business activity following a change in ownership of more than 50%. For example, if Company A incurs a Tax Loss in 2023 and experiences a change in ownership of more than 50% in 2025, it can only carry forward and utilise the Tax Loss if it continues to conduct the same or a similar business or business activity after the change in ownership.

How to Identify Change in Business?

relevant factors for determining whether a Taxable Person has continued to conduct the same or a similar Business or Business Activity following a change in the direct or indirect ownership include:

a) the Taxable Person uses some or all of the same assets as before the ownership change;

b) the Taxable Person has not made significant changes to the core identity or operations of its Business since the ownership change; and

c) where there have been any changes, these result from the development or exploitation of assets, services, processes, products, or methods that existed before the ownership change.

Latest developments in Tax Loss Relief

Small Business Relief and Tax Loss.

A taxable person with AED 3 Million can elect for small business relief, if a person elect for small business relief during a particular year, he is not eligible to carry forward business losses to subsequent financial year.

1. As per Ministerial Decision No 73 of 2023, Where an election to apply the Small Business Relief is made in a Tax Period, any Tax Losses incurred in such Tax Period cannot be carried forward to any subsequent Tax Periods.

2. Any unutilised Tax Losses incurred in previous Tax Periods where an election to apply the Small Business Relief was not made, may be carried forward to subsequent Tax Periods in which an election to apply the Small Business Relief is not made, subject to the conditions of Article 37 of the Corporate Tax Law.

In simple words, If a person with AED 3 Million taxable income chooses to use the Small Business Relief in a specific year, they cannot carry forward any business losses from that year to the next. This is in line with Ministerial Decision No 73 of 2023. However, if the relief isn't chosen in a year, any unused losses from previous years can be carried forward to future years, as long as the conditions in Article 37 of the Corporate Tax Law are met.


Disclaimer: The information provided in this article is for general educational purposes and is not intended to serve as professional advice, whether financial, legal, tax-related, or any other field. Laws and regulations can change, and individual circumstances can vary widely. Relying solely on the information in this article for making important decisions is not recommended, and we disclaim any liability for actions taken without seeking appropriate professional consultation.