CORPORATE TAX IN UAE – TAX LOSSES

CORPORATE TAX IN UAE – TAX LOSSES

Corporate Tax is payable when the taxable person’s taxable revenues are more than the expenses incurred during a tax period. However, this need not always be the case. It is possible that businesses may incur more expenses than it earns in revenue. A Tax Loss occurs when the total tax-deductible expenses are greater than the taxable revenues earned during a particular tax period.

To ensure the fairness of the tax system the Federal Tax Authority provides some reliefs while the businesses are in losses. The authority allows businesses to use the loss generated in a tax period to offset the taxable income in the future tax periods indefinitely.

As per the decree law on Taxation of Corporations and businesses, a Tax Loss may be offset in the following ways:

• Carry forward against the taxable income of subsequent tax periods of the same taxable person, subject to conditions.
• Transfer to another taxable person, subject to conditions.

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Carry Forward of Tax Losses

A Tax Loss incurred in a tax period can be carry forwarded to the succeeding tax periods against the Taxable Income of succeeding periods, to determine the tax payable for each tax period. This acts as a benefit since the loss when adjusted against Taxable Income shall reduce the overall tax liability payable of subsequent or succeeding periods.

The amount of Tax Loss used to reduce the Taxable Income for any subsequent Tax Period cannot exceed 75% of taxable income for that subsequent tax period. Any loss remaining unutilised may then be carry forwarded to the following years. It is noteworthy to mention that the offset of loss must be done in the immediate subsequent tax period in which the taxable person earns a taxable income before any remainder can be carried forward to further subsequent periods.

For the purpose of carry forward of losses the taxable person must meet any of the following conditions.

a)????50% of ownership interest must be held by the same person or persons from the tax period of losses to the tax period in which the offset is done against a taxable income.

b)????Or the taxable person must carry on the same business or business activity in case of a change in ownership more than 50%.

A Taxable Person cannot claim Tax Loss relief for all the losses incurred before the date of commencement of Corporate Tax, losses incurred before the Person becomes a Taxable Person and losses incurred from an asset or an activity the income of which is exempt.

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Transfer of Tax Losses

We have discussed above that a taxable person can carry forward tax losses to the succeeding tax periods of the same taxable person. Here we will see how a Tax loss of a taxable person can be transferred to another taxable person.

As per the decree law it is allowed to transfer the tax losses between two separate companies if all of the following conditions are met:

a)?????Both taxable persons are Juridical Persons.

b)????Both taxable persons are Resident Persons.

c)?????Either person has at least 75% direct or indirect ownership interest in the other person, or a third person has at least 75% direct or indirect ownership interest in each of the persons.

d)????The common ownership must exist from the start of the tax period in which the Tax Loss is incurred to the end of the tax period in which the other taxable person offsets the Tax Loss transferred against its Taxable Income.

e)????None of the persons are an Exempt Person.

f)??????None of the persons are a Qualifying Free Zone Person.

g)?????Both taxable persons follow the same financial year.

h)????Both taxable persons prepare their financial statements using the same accounting standards.

In the event of transfer of Tax Losses, the receiver’s taxable income for the tax period is reduced. The transfer of loss of a taxable person pertains to a tax period is only allowed if the taxable person itself is in loss position in the subsequent period or if the taxable person has any remainder of tax losses after the carry forward of losses to offset its own taxable income in the subsequent period. Moreover, the total loss transferred shall not exceed 75% of the taxable income of the receiver.

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