The UAE is implementing the corporate tax on June 1, 2023. In order to remain attractive for businesses, the UAE has set the standard rate of corporate tax at 9%. However, this 9% rate only applies to businesses that have taxable profits of over AED 375,000. Businesses with taxable profits of up to AED 375,000 are subject to 0% corporate tax. Furthermore, the UAE also allows relief for tax losses in corporate tax; however, it is subject to conditions. In this article, we will discuss tax losses and their implications for corporate tax in the UAE. Federal Law No. 47 of 2022 is the primary source of information on this topic.
Tax Losses in Corporate Tax: Key Factors in the UAE
What is a tax loss?
A tax loss refers to a loss, as per the tax laws, that a business incurs in a given tax year. It occurs when expenses or deductions (allowed under tax law) exceed the revenue (taxable income), resulting in a net loss. The resulting tax loss is offset against future taxable income. As the tax losses are offset in the future, these are referred to as carry-forward tax losses. A business can also offset tax losses against previous years’ profits; however, this is currently not allowable in the UAE.
Tax loss relief
Under Article 37 of the tax law, a tax loss can be offset against the taxable income of subsequent tax periods. This will enable businesses to reduce their taxable income, ultimately reducing their tax liability. However, it is worth noting that a business can offset tax losses up to 75% of the taxable income (before tax loss relief) in any subsequent tax period.
The carryforward tax loss to a subsequent tax period shall set off against that period only. If there is any remaining tax loss, the business should carry it forward to the next subsequent period. Carry-forward tax losses are set off first if there are any tax losses transferred under Article 38 of the tax law.
When is tax loss relief not available?
A taxable person or a business cannot claim tax loss relief in the following circumstances:
1) when a business has losses prior to the commencement of the corporate tax regime.
2) when a business has losses prior to becoming a taxable person under the corporate tax law.
3) when the loss is from an asset or an activity that is exempt under the decree-law.
Transfer of tax losses:
As per Article 38 of the tax law, a taxable person can transfer their tax losses to another taxable person. However, there are conditions that the taxable persons or businesses need to meet. The conditions are:
1) Both businesses are legal entities.
2) Both businesses are residents.
3) Either one of the taxable entities has a direct or indirect ownership stake of at least 75% in the other entity. Or a third party holds a direct or indirect ownership stake of at least 75% in both entities.
4) The shared ownership mentioned in point (3) must be present throughout the entire tax period in which the tax loss occurs, until the end of the tax period in which the other taxable entity offsets the tax loss against its taxable income.
5) None of the entities are exempt from taxation.
6) None of the entities qualify as a Qualifying free zone person.
7) Both entities have the same fiscal year-end date.
8) Both entities use the same accounting standards when preparing their financial statements.
Note that the tax Loss offset shall not exceed the amount permissible as per Article 37 of the tax law. Furthermore, the transfer of tax losses is not applicable for a taxable person with shares listed on a stock exchange.
Understanding corporate tax losses is crucial for businesses operating in the UAE. The UAE provides relief for tax losses in corporate tax, allowing businesses to offset these losses against future taxable income. However, businesses must meet certain conditions in order for tax loss relief to apply. Businesses can carry forward their tax losses to subsequent tax periods and offset them against taxable income. However, it is subject to conditions and limitations. Transfer of tax losses is also possible between entities; however, entities must meet specific criteria as per the tax law. It is important to note that tax laws can change; therefore, it is advisable to seek professional advice to ensure compliance. This will allow businesses to make better business decisions.
Consult CZTA for taxation services:
It is worth noting that tax laws and regulations are subject to change. Therefore, it is advisable to consult with a qualified tax advisor who is familiar with the latest UAE tax laws. Creative Zone Tax Accounting has a team of expert tax accountants who are always ready to assist you. Book a consultation now to get prompt and up-to-date advice.