Businesses in the UAE now have to deal with corporate tax. Companies have started to pay more attention to tax planning, compliance and strategic financial management with the introduction of Federal Decree Law No. 47 of 2022. Tax loss relief is one of the most useful tools under the UAE corporate tax regime.

In cases where a business incurred a loss, the law allows that loss to be carried forward and used to reduce tax payable in future profitable years. It helps businesses protect cash flow, stay competitive and grow sustainably.

This blog elaborates on the concept of tax loss relief, its advantages and the main conditions that every UAE business must follow to utilize this mechanism effectively. 

Understanding Corporate Tax Losses in the UAE

Corporate tax losses occur when deductions on a company’s expenses are greater than its taxable income in a financial period. Such losses can be incurred due to a number of reasons, such as expansion of the business, changes in the market, investment in new facilities or a variation in revenue.

The UAE corporate tax law enables businesses to carry forward qualifying losses to subsequent years, where they can be deducted against taxable profits. It makes sure that firms are not penalized during difficult years and still benefit from investment and expansion.

However, remember that only losses arising from the business activity that is subject to corporate tax can be carried forward. Losses from exempt income, personal expenditure, fines, penalties and non-deductible expenses cannot be used for loss relief.

Related: VAT vs. Corporate Tax in the UAE: What Every Business Owner Needs to Know

How Tax Loss Relief Works Under UAE Corporate Tax

Tax loss relief is a system that enables the business to lower its taxable base during profitable years by deducting losses incurred in previous financial years. The law allows a business to deduct up to 75% of the taxable income with the assistance of carried forward losses.

For example, a business earns a taxable profit of AED 1,000,000 in the future year and has AED 600,000 of carried forward losses, the company may utilise up to AED 750,000 (75% of 1,000,000) to reduce the taxable base.

Only the remaining AED 250,000 would be subject to corporate tax. Loss carryforward will continue until the losses are completely absorbed, provided that all the regulatory conditions are satisfied. This makes the relief a very powerful planning tool for companies experiencing varying profits across different financial periods.

Also Read: How to Register for Corporate Tax in the UAE: Step-by-Step Guide

Benefits of Carrying Forward Tax Losses in the UAE

The UAE system offers several strong advantages that facilitate business development and financial security.

Improved Cash Flow

The ability to set off losses against future profits helps businesses reduce tax payments in profitable years. It allows them to save a significant amount of money to be used on operations, expansion or investment.

Competitive Edge

The ability to use losses to offset taxes enables businesses to reduce their tax burden, which gives them more flexibility for pricing, improving operations and reinvestment- all while staying compliant with tax laws. 

Stronger Business Sustainability

In difficult economic periods, tax relief provides support and allows businesses to operate without fear of excess tax burden. 

Supports Long-Term Growth

Organisations usually face more expenses when entering a new market or introducing new services. Tax loss relief helps ensure that early losses do not impact long-term profitability and encourages strategic investment.

Better Financial Planning

Loss carryforward enables companies to estimate their future liabilities better. Cash outflow predictability helps in decision making and resource allocation across financial years.

Key Conditions to Carry Forward Tax Losses

To effectively utilize tax loss relief, businesses should ensure that they do not violate certain conditions.

Same Taxable Person

Losses can only be carried forward if the same legal or taxable person continues to exist. Significant changes in ownership can have an impact on eligibility unless commercial reasons are proven. 

Losses Must Be Verified

The losses are supposed to be documented in a proper manner, reported in financial statements and supported by accounting records. Since tax authorities could request evidence, companies must ensure accuracy. 

Business Continuity

The company must continue its activities. An absolute change in nature or structure can limit the right to use carried forward losses unless approved by the authorities. 

Ownership Test

At least 50% ownership should remain unchanged between the loss year and the year when the loss is used. It prevents misuse through artificial transfer of losses.

No Relief for Excluded Items

Exempt income losses, non-deductible expenses or unrealized gains should not be included in tax loss relief and must be excluded from calculations. 

Common Mistakes in Tax Loss Carryforward

Businesses must not make some mistakes that can result in non-compliance or rejection of relief.

Incorrect Loss Calculation

There are companies that fail to separate deductible business losses from non-deductible amounts. Calculation errors can lead to disallowed claims and penalties. 

Inadequate Documentation

The losses are to be recorded with supporting documents. Absence of invoices, incorrect journals or poor accounting records are amongst the most common reasons why authorities question loss claims.

Ignoring Ownership Changes

When ownership transitions take place, businesses tend to forget to look at whether the fifty percent ownership rule still applies. This may result in rejection of loss relief in later years. 

Lack of Strategic Planning

Tax loss relief must be a part of yearly tax planning. There are businesses that fail to project the profit years properly and take the opportunity to lower taxable income. 

Non-Compliance with Reporting Requirements

Companies occasionally delay the filing of tax returns or do not disclose the losses correctly. Tax loss recognition requires timely reporting and proper declarations.

Conclusion

Tax loss relief is a critical tool that benefits companies operating in the UAE. It encourages expansion, rewards investment and enables companies to stabilize during times of uncertainty. Companies can significantly reduce future tax liability and strengthen their financial capacity by carrying forward legitimate losses.

However, this relief requires proper planning, accurate records keeping and compliance with ownership and reporting requirements. Businesses should seek the advice of corporate tax consultants in UAE, so that the relief is applied correctly and that no opportunities are lost due to misunderstanding or lack of documentation. 

Strategic Tax Planning with Asad Abbas & Co.

At Asad Abbas Co., we possess extensive experience in corporate tax services in UAE. Our experts help companies identify tax losses, document these losses properly and plan how to utilize them across future years. This expert guidance will enable businesses to maintain full compliance while ensuring tax efficiency.

Our tailored guidance also ensures that all clients can take advantage of the tax relief under UAE law and remain prepared to undergo a financial audit or reviews by the authority. Contact us today if you want to protect your business, reduce future tax liability and receive expert guidance on corporate tax in the UAE! 

Continue Reading: Why Your Business Needs Financial Advisory Services for Sustainable Growth

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