Tax losses are one of the more valuable and more misunderstood reliefs available under UAE Corporate Tax. Used correctly, they can meaningfully reduce future tax payable; used incorrectly or overlooked around a change of ownership or a deregistration, they can be forfeited entirely. This briefing walks through what counts as a tax loss, how relief works, and the conditions that apply to carrying losses forward or transferring them to another group company.

A tax loss arises for a Tax Period when a company's deductible expenses exceed the income that is subject to Corporate Tax in that period. In practical terms, it is negative Taxable Income, the figure produced once Accounting Income has been adjusted in line with the Corporate Tax Law.

Not every commercial loss qualifies for relief. The following are excluded:

•     Losses incurred before Corporate Tax took effect on 1 June 2023.
•     Losses incurred before the company became a Taxable Person.
•     Losses arising from activity that does not generate Taxable Income in the first place, such as Exempt Income.

A company has two ways to use a tax loss:

•     Carry it forward and offset it against its own Taxable Income in future Tax Periods.
•     Transfer it to another eligible Taxable Person, to offset against that company's Taxable Income.

Where a tax loss cannot be fully used in the period it arises, the unused balance carries forward indefinitely — there is no expiry on a company's own losses, subject to the ownership and business-continuity rules below.

The catch is the 75% cap: in any Tax Period, the total tax losses a company can offset are capped at 75% of that period's Taxable Income, calculated before any loss relief. Older losses must be used before more recent ones.

Relief is also mandatory, not optional, a company must offset the full 75% available before carrying the remainder forward. It cannot elect to use less in order to preserve a larger balance for a future period.

One further sequencing rule applies where a company has both its own carried-forward losses and losses transferred in from another company: its own losses must be fully used first, and only the remainder of its own losses can be transferred out to another Taxable Person for that period.

A change of ownership can restrict the use of carried-forward losses. This is triggered when more than 50% of the ownership interests in a company change, comparing the start of the Tax Period in which the loss arose with the end of the Tax Period in which it is used. Ownership interests include any equity-type interest carrying rights to profit and liquidation proceeds, for example, if three out of five equal shareholders sell their entire stakes at the same time, that is a change of more than 50%. Both direct and indirect ownership count.

Where such a change occurs, the losses remain usable only if the company continues the same or a similar business or activity, the nature of the business must stay substantially unchanged. Relevant factors include:

•     Whether the company still uses some or all of the same assets as before the change.
•     Whether the core identity and operations of the business remain unchanged.
•     Where changes have occurred, whether they simply reflect the natural development of assets, services, processes or products that already existed before the change.

Tax losses can be lost entirely in a number of situations. Common triggers include a change in business activity following a greater-than-50% ownership change (see Section 5), and deregistration from Corporate Tax.

Losses can also move sideways, to another Taxable Person within the same ownership structure — provided all of the following conditions are met:

Where all conditions are satisfied, the transferring company can choose how much loss to pass across — it does not have to transfer the maximum available. There is also no limit on the number of companies a loss can be transferred to.

The same 75% ceiling applies on the receiving end: transferred losses plus the receiving company's own carried-forward losses cannot together exceed 75% of its Taxable Income for the period. And as noted in Section 4, a company must exhaust its own carried-forward losses before transferring any surplus out.

Electing for Small Business Relief (SBR) in a Tax Period means the company is treated as having no Taxable Income for that period  and consequently, no tax loss can arise in it either.

Losses carried forward from earlier periods (before SBR was elected) cannot be used or transferred in a period where SBR applies. They are not lost, however they remain available to carry forward and use once SBR no longer applies, or to transfer to another company, subject to the usual conditions.

•     Losses can be carried forward indefinitely, but usage each period is capped at 75% of Taxable Income before relief.
•     A greater-than-50% change in ownership can restrict  or forfeit  carried-forward losses unless the business continues largely unchanged.
•     Transferring losses between companies requires seven separate conditions to be met simultaneously, including 75% common ownership and matching accounting standards.
•     Electing Small Business Relief pauses the use of pre-existing losses for that period, without forfeiting them.

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.