Tax Losses and Their Implications on UAE Corporate Tax
Businesses in the UAE must understand corporate tax and how tax losses affect them. Every company wants to know the best way to handle losses to save money on taxes. The government of the UAE brought in corporate tax to follow international rules and help the country grow beyond oil. Companies now pay tax every year. The rate is 0% for income below AED 375,000 and 9% for anything above that.
What Is a Tax Loss in UAE Corporate Tax?
A tax loss happens when a business’s total deductions are more than its taxable income for the year. This means the company does not make a profit and, instead, reports a negative taxable income. The new tax system in the UAE allows businesses to carry forward these tax losses and use them in the future to reduce tax bills. This system is helpful for companies during tough years.
How Tax Loss Relief Works
Article 37 of the UAE tax law covers Tax Loss Relief. If your business has a loss this year, you can use that loss to lower your taxable income in future years. However, you can’t use all the losses at once.
- The law says you can only use up to 75% of your taxable income for that year to set off losses.
- Any unused loss gets carried forward to the next year.
- You can’t claim relief for:
- Losses from before corporate tax started in June 2023.
- Losses before your business became a “taxable person.”
- Losses from activities or assets that are exempt from corporate tax.
Example:
If your business makes AED 200,000 in taxable income but has a carried forward loss of AED 175,000, you can set off 75% of 200,000 (AED 150,000). Your taxable income then drops to AED 50,000, and you can carry forward the remaining AED 25,000 to the next year.
How Tax Loss Transfer Works
Article 38 of the law talks about the Transfer of Tax Losses. This is when one company passes some or all of its tax losses to another company.
To do this, companies must meet the following rules:
- Both must be juridical persons (companies, not individuals).
- Both must be UAE residents.
- There must be at least 75% direct or indirect ownership link between them.
- The ownership link must be in place from the start of the loss period to the end of the year the loss is transferred.
- Neither company can be exempt from tax.
- Neither company can be a qualifying free zone person.
- Both must have the same financial year-end.
- Both must use the same accounting standards.
This transfer helps companies in the same group to share the benefit of tax losses, as long as they meet all the requirements.
Limits on Carrying Forward Tax Losses
Article 39 covers limits on carrying losses forward:
- The same person must own at least 50% of the business from the start of the loss period to the time the loss is used.
- If more than 50% of the business changes hands, the business must still do the same or similar activity to use the old losses.
- Group companies in the UAE can set off losses against each other if there is at least 75% common ownership and all other rules are followed.
This rule does not apply to companies listed on a recognized stock exchange.
When Can You Not Use Tax Losses?
Businesses must remember some important points:
- You can’t use losses from before the new tax law started.
- You can’t use losses from activities that are tax-exempt.
- You need to keep good records to prove your losses.
- If the company’s ownership changes, check if you still meet the rules for carrying forward losses.
Key Points to Remember about Tax Losses
- You can set off losses: This helps lower future tax bills.
- You can transfer losses: Only if you meet ownership and group rules.
- Limits apply: You can’t use all losses at once and there are rules for carry forward.
- Keep records: You must keep documents to prove the amount and source of your losses.
How Mubarak Al Ketbi (MAK) Auditing Can Help
When it comes to tax losses, you don’t want to let the grass grow under your feet! Mubarak Al Ketbi (MAK) Auditing helps UAE businesses make sense of tax losses and corporate tax law. Our expert team will help you:
- Track and record tax losses
- Set off losses the right way
- Transfer losses in group companies
- Keep your business compliant and avoid tax mistakes
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp: +971 50 276 2132
