Tax Loss Relief Mechanism Under UAE Corporate Tax Law: A Comprehensive Guide

This article offers a comprehensive and regulatory-focused understanding of Tax Loss Relief under UAE Corporate Tax Law. The sections below outline the rules for carrying forward, offsetting, transferring tax losses, and the strategies for tax planning to maximize the benefits of these provisions.

1. Offsetting Tax Losses: Article 37

A tax loss can be carried forward and set off against the taxable income of future periods. However, the amount of tax loss that can be utilized in any subsequent period is limited to 75% of the taxable income for that period. They can only set off up to 75% of their taxable income for that period with carried forward losses.

Conditions for Claiming Relief: When Set Off is Not Allowed:

? Tax losses incurred before the commencement of the corporate tax law cannot be claimed. Pre-Corporate Tax Losses: Losses incurred before the corporate tax regime commenced (before June 1, 2023) are not eligible for set-off.

? Non-Taxable Person Losses: Losses incurred by an entity before it qualifies as a taxable person under the corporate tax law cannot be utilized for tax relief. Losses incurred by an entity before it becomes a taxable person under the law are also not eligible for relief.

? Exempt Activities: Losses from activities or assets that are exempt from taxation under the law are not eligible for offsets. Losses from activities or assets that are exempt from taxation under the law cannot be offset.

? Ownership Changes: Significant changes in ownership (over 50%) may disqualify a business from carrying forward losses unless it maintains Continuity in operations.

[ Continuity Requirement:

The business must continue its operations in a similar manner to utilize these losses. For example, a clothing retailer can carry forward losses if it continues operating as a clothing store, even if it changes location or name.

In determining whether a Taxable Person has maintained continuity of operations after a change in ownership, key factors include the ongoing use of existing assets, minimal or no significant changes to the core identity or operations of the business, and any changes being tied to the development or enhancement of pre-existing assets, services, or processes. This ensures that any operational shifts are seen as a natural progression of the business rather than a fundamental alteration driven by the ownership change.

However, this provision of ‘continuity’ shall not apply to a Taxable Person whose shares are listed on a Recognized Stock Exchange. ]

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1A. Carryforward Mechanism:

The tax loss must first be applied to reduce the taxable income of the subsequent period before any remaining loss can be carried forward to further periods or transferred to another taxable entity or tax loss transferred can be utilised.

2. Transfer of Tax Losses between Group Entities: Article 38

Article 38 outlines conditions under which tax losses can be transferred between entities, ensuring that such transfers comply with ownership and business continuity requirements. This is for prohibition of creating new losses via transferred losses. The income company cannot create a loss by utilizing the transferred losses; it can only reduce its taxable income to zero.

Conditions for Transfer:

? Both entities must be juridical persons and UAE residents.

? Either one entity must have at least 75% direct or indirect ownership in the other, or a third entity must have at least 75% direct or indirect ownership in both entities.

? The common ownership must exist from the beginning of the tax loss period until the end of the period when the tax loss is transferred.( both in the financial year when the loss was incurred and the year when the set-off is being claimed)

? Neither entity can be an exempt person or a qualifying free zone person.

? The financial year-end date must be the same for both entities.

? Both entities must use the same accounting standards.

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Adjustment After Transfer:

After the transfer of losses, the loss company’s tax losses are reduced by the amount transferred, while the income company can utilize the transferred losses subject to the 75% limitation and its own taxable income. This later part to ensure that no more than utilizable amount of tax losses can be transferred.

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3. Transfer of Unutilized Losses in Restructuring:

Tax losses can be transferred in the event of a business restructuring, provided the common ownership test is met. The losses can be transferred to the new entity that continues the same or similar business activities.

4. Exclusive Section: Tax Planning Strategies for Maximizing the Benefits of Tax Loss Relief

The UAE Corporate Tax Law provides opportunities for businesses to strategically plan their tax loss relief to maximize tax benefits. Key considerations include:

1. Carryforward Utilization: Businesses should project future profits and strategically apply tax losses to ensure they are offset within profitable years, keeping in mind the 75% limit of taxable income.

2. Ownership Continuity: When planning restructuring or ownership changes, businesses should ensure that continuity requirements are met to avoid disqualification from utilizing carried-forward or transferred tax losses.

3. Group Structuring: Companies within a group structure can benefit from transferring tax losses but must ensure that both common ownership and operational continuity are maintained.

4. Exempt and Non-Taxable Losses: Businesses should carefully assess which activities and assets generate taxable versus exempt income, as only taxable losses can be offset.

5. Restructuring Planning: In the event of a business restructuring, losses can still be carried forward or transferred, but ensuring compliance with ownership and continuity rules is key to retaining those benefits.

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