Understanding Tax Loss under Corporate Tax in UAE and Its Implications for Businesses

A Tax Loss occurs when a business's deductible expenditure surpasses its income subjected to Corporate Tax.  Businesses who have a tax Loss will be able to use the Tax Loss to reduce Taxable Income in future Tax Periods. The significance of this lies in its ability to offset taxable income in future tax periods. In certain circumstances, Tax Losses can also be used to offset against the Taxable Income of another Business. 

However, there are restrictions on claiming Tax Loss relief. A taxable person cannot claim relief if: 

• The losses are incurred before the date of commencement of Corporate Tax 

• The losses are incurred before a person becomes a Taxable Person 

• The losses are incurred from an asset or activity which generates income is exempted from Corporate Tax 

Additionally, a taxable person cannot claim tax losses for the period in which they have opted for small business relief. 

A taxable person who has carry forward tax losses can offset them against taxable income in the subsequent tax periods with the profits. The relief allows businesses to set off tax losses against taxable profits, up to a maximum of 75% of the taxable income.  

It is crucial for taxable persons to utilize available Tax Losses within a tax period before considering carrying them forward to the next period or transferring them to another taxable person, subject to specific conditions. 

If a taxable person has carried forward tax losses of less than 75% of their taxable income, they must use all of the tax losses in the current period and cannot choose to carry these tax losses forward. And likewise, tax losses cannot be carried back to previous tax periods. 

A key consideration in Tax Loss Relief is the impact of changes in ownership. Tax Losses can be carried forward by a taxable person if the ownership change does not exceed 50% from the start to the end of the period in which the loss was incurred and used for set off against taxable income. Even if there is a change in the ownership of more than 50%, the tax losses can still be carried forward, provided, the same or similar business is continued post the ownership. 

The ability to transfer Tax Losses between taxable persons adds another layer of flexibility to the relief mechanism. Transfers are permissible between Resident juridical persons under certain conditions, such as: 

• one entity has a direct or indirect ownership interest of at least a 75% in the other, or a third entity has a direct or indirect ownership interest of at least 75% of the shares in both 

• they share the same Financial Year 

• they prepare their Financial Statements using the same accounting standards 

• none of the Persons are Exempt Persons or Qualifying Free Zone Persons. 

To facilitate the transfer of tax losses, qualifying to common ownership, conditions must be met from the start of the tax period in which the tax loss is incurred, to the end of the period in which the transferred tax loss is utilized. 

Transferred Tax Losses can reduce the recipient’s Taxable Income by a maximum of 75% of their Taxable Income in that Tax Period. This implies that the transferred loss cannot exceed the higher of the Tax Loss carried forward by the transferor or 75% of the transferee's taxable income. 

To conclude, having an in-depth understanding of tax loss relief is important for businesses aiming to optimize their tax positions. The relief provides a strategic mechanism for managing financial challenges, but businesses must navigate through a series of conditions and restrictions. By carefully leveraging the tax loss relief, businesses can ensure consistency in their Corporate Tax payments while adapting to changing circumstances, including shifting in ownership and transfer of tax losses.