Understanding Tax Loss Transfer Under UAE Corporate Tax Law
Navigating the complexities of taxes can be overwhelming for investors and businesses operating in the UAE, especially with the recent changes in corporate tax regulations. One of the most significant provisions under the UAE Corporate Tax Law is the concept of transferring tax losses. This provision offers businesses the opportunity to offset their losses against future profits or even transfer them to other related entities.
Understanding this aspect of tax law can significantly reduce your overall tax liability, making it essential for business owners and investors to be well-versed in these regulations. In this blog, we’ll explain everything you need to know about tax loss transfer under UAE law, including the conditions and limitations, as well as how you can use it to your advantage.
What is a Tax Loss?
As a business, it’s possible to incur expenses that exceed your earnings in any given tax period. This means that your taxable income becomes negative, resulting in a “tax loss.” This loss is a result of your business operations during a specific period and can be carried forward to offset against future taxable income.
What is Tax Loss Relief?
Tax loss relief is the opportunity to offset a tax loss from one period against taxable income in future periods. By doing this, you can reduce the amount of tax you need to pay. However, businesses must use any available tax losses from the current tax period before carrying forward any remaining losses or transferring them to another taxable person. Importantly, losses cannot be carried back to previous periods.
For example, if a business has tax losses from a current period, it must apply them to the entire taxable income of that period before deciding to carry any remaining losses forward. A business cannot choose to carry forward only part of the losses without using them up in the current period first.
When Can Tax Loss Relief Not Be Claimed?
You cannot claim tax loss relief under certain conditions, including:
Losses incurred before the start of the UAE Corporate Tax Law.
A person incurred losses before becoming a taxable entity under the law.
Losses related to activities or assets that are exempt under the law.
If a business has elected to benefit from Small Business Relief during a tax period.
Can You Transfer Tax Losses?
Yes, under certain conditions, you can transfer tax losses to another taxable person. This allows businesses in the same group to share tax losses and reduce their collective tax liabilities. The transfer of tax losses requires that the following conditions be met.
Key Criteria for Transferring Tax Losses:
Both entities must be juridical persons (i.e., legally recognized entities).
Both entities must be residents of the UAE.
One entity must own at least 75% of the other, or a third entity must own 75% of both.
The common ownership must exist from the beginning of the tax period in which the loss is incurred until the end of the period when the tax loss is transferred.
Both entities must not be exempt or qualifying free zone entities.
The financial years of both entities must align (i.e., both must end on the same date).
Both entities must follow the same accounting standards.
Limitations on Setting Off Tax Losses
The amount of tax loss that can be transferred or set off is limited to 75% of the taxable income in a given period. For example, if a taxable person has a taxable income of AED 1,000,000, they can only use 75% (AED 750,000) of their tax losses to offset this income.
Example: How Tax Loss Transfer Works Between Two Companies
Imagine two companies, A LLC and B LLC, operating within the same financial year.
A LLC has had a tough year, incurring a tax loss of AED 2,000,000 due to higher expenses than revenue.
B LLC has experienced a profitable year, earning a taxable income of AED 2,000,000.
To optimise their tax positions, A LLC and B LLC take advantage of the tax loss transfer provision under UAE Corporate Tax Law. A LLC transfers AED 1,500,000 of its tax loss to B LLC. This transfer allows B LLC to reduce its taxable income from AED 2,000,000 to AED 500,000.
As a result, both companies get benefits:
B LLC’s tax liability decreases significantly,
A LLC retains the remaining AED 500,000 of its tax loss, which it can carry forward to future tax periods.
This strategic move not only helps both companies reduce their overall tax burden but also showcases how businesses within a group can collaboratively manage tax liabilities for mutual benefit.
Here’s how the tax loss transfer works:
Amount AED
A LLC
B LLC
Taxable Income / (Loss)
(2,000,000)
2,000,000
Tax Loss transferred
1,500,000
0
Tax Losses received
0
(1,500,000)
Final Taxable Income / (Loss)
(500,000)
500,000
Tax Loss carried forward
(500,000)
0
How We Can Help
The intricacies of tax loss transfer under the UAE Corporate Tax Law can be difficult to navigate, especially for businesses unfamiliar with tax laws. At My Business Consulting DMCC, we specialize in providing expert assistance with tax compliance, accounting and bookkeeping services to ensure your business remains fully compliant and tax-efficient. Let us help you manage your tax losses, optimize your financial operations, and ensure your business stays on the right track in the UAE.
Contact us today to discuss how we can support your business in managing tax compliance and help with your accounting and bookkeeping needs.
