Transfer of Tax Loss under UAE Corporate Tax Law

Introduction – Chapter 11- Transfer of Tax Loss under UAE Corporate Tax Law

As a corporate entity that is engaged in Business Activities, operating in a dynamic economy can lead to business losses, i.e., the expenses incurred are more than the revenue earned. During that Tax Period, the Taxable Income will be negative after calculation. This negative Taxable Income is called Tax Loss.

Article 37 – Tax Loss Relief under UAE’s Corporate Tax Law

A Tax Loss incurred in a Tax Period can be offset in the succeeding Tax Periods against the Taxable Income of the successive Tax 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 Taxable Income, thus reducing the overall tax liability payable under the UAE Corporate Tax Law.

For a succeeding Tax Period, the amount of Tax Loss that is to be adjusted cannot be above seventy five percent (75%) of the Taxable Income for reducing the Taxable Income.

The Tax Loss carried forward must be set off against the Taxable Income of the subsequent Tax Period. This is to be done before the remaining Tax Loss is carried forward to the succeeding Tax Period or the Tax Loss is transferred to another Taxable Person.

When can Taxable Persons not claim Tax Loss Relief under the UAE Corporate Tax Law?

A Tax Loss relief cannot be claimed for the losses where they were incurred:

1. Before the date of commencement of the UAE Corporate Tax Law
2. By a Person before becoming a Taxable Person under the Law
3. On an activity or asset from which the income is exempt under the Law.

Article 38 – Transfer of Tax Loss under the UAE Corporate Tax Law

Conditions to be Fulfilled for set off of Tax Loss between Taxable Persons

The Tax Loss can be set off or transferred against the Taxable Income of two Taxable Persons if the following conditions are satisfied:

1. Both Taxable Persons are juridical persons
2. Both Taxable Persons are Residents
3. Ownership Interest:
   1. Any one of the Taxable Persons has seventy five percent (75%) or more ownership interest in the other; or
   2. A third person has seventy five percent (75%) or more of ownership interest in both the Taxable Persons.
   3. It can be either direct or indirect ownership interest.
4. The ‘common ownership’ should be from the beginning of the Tax Period when the Tax Loss is incurred. It will be till the end of the Tax Period when the Tax Loss is offset by the other Taxable Person
5. Both Taxable Persons are not Exempt Persons
6. Both Taxable Persons are not Qualifying Free Zone Persons
7. For both Taxable Persons, the Financial Year ends on the same date
8. Both Taxable Persons prepare their Financial Statements as per the same accounting standards

Note: The ability to transfer Tax Losses covers both Tax Losses arising in a current Tax Period and those brought forward from a previous Tax Period. 

The ability to transfer Tax Losses under this Article supplements the rules on Tax Groups, that provides another opportunity for Tax Losses to be utilised amongst Taxable Persons. 

Considerations after the Tax Loss is transferred between two Taxable Persons

When a Tax Loss is transferred between two Taxable Persons, then this will lead to:

1. Reduction in Taxable Income: The Taxable Income of the Taxable Person, to whom the Tax Loss has been transferred shall be reduced to adjust the loss against the Taxable Income.
   Transferring Tax Losses: A single Taxable Person can transfer the Tax Losses to more than a single Taxable Person. This is in the case where the relationship of the recipient Taxable Person with the Taxable Person transferring their Tax Losses meets the conditions specified.
   
2. Limitation to Set Off: The total amount of the Tax Loss which is to be set off should not be more than 75% of the Taxable Income of a particular Tax Period.
   Transferring to more than one person: If a single Taxable Person transfers Tax Losses to more than one Taxable Person, the threshold will apply separately to each of the recipients of the Tax Loss based on the Taxable Income (before utilizing any Tax Loss relief). 
3. Reduction in Tax Losses: The Taxable Person who has transferred the Tax Loss shall reduce its Tax Loss up to the extent it has transferred such Loss.

Article 39 – Limitation on Tax Losses Carried Forward under the UAE Corporate Tax Law

The Tax Loss will be carried forward as per Article 37. But there are certain limitations on carry forward and utilisation of the Tax Loss. Tax Losses can only be carried forward from one Tax Period to a subsequent one where there is either a continuity of: 

1. Ownership or  
2. Business or business activity of the Taxable Person. 

Reason for Limitation on Carry Forward of Tax Losses 

Through the rule to restrict the ability to carry forward Tax Losses, it represents a specific anti-abuse measure to prevent the practice of ‘loss trading’. In loss trading, the entities could artificially reduce their Corporate Tax liability through acquiring entities that have Tax Losses. 

Certain conditions must be complied with to carry-forward the Tax Losses to the subsequent Tax Period. They are:

1. Ownership Interest of Same Person: From the beginning of the Tax Period in which the Tax Loss was incurred till the end of the Tax Period in which the carried forward Tax Loss was offset; the same person(s) should have fifty percent (50%) or more of ownership interest in the Taxable Person.
2. Conduct same or similar Business Activity: If there is a change in ownership interest i.e., it exceeds fifty percent (50%), the Taxable Person should continue being engaged in the same or a similar Business Activity.

Conducting Same or Similar Business Activity: The factors to ascertain same or a similar Business Activity are if the Taxable Person:

1. Utilizes some or all of the assets as before the change in ownership
2. Not made any significant changes to the core operations or identity of the business
3. If there are any changes, it is because of the exploitation or development of services, assets, resources etc. that existed before the change in ownership.

Same or Similar Business Activity – Core Characteristics 

The determination of the same or similar business activity is dependent on the specific facts and circumstances.  

However, for the current business or activity to be considered the same or similar to the former business or activity, there should be a clear closeness in the identity of the operations of the former and current business or activity.  

If it changes its core characteristics, or if there is a change as a result of commencement, acquisition or cessation of activities, then the new business or activity may not be considered to be the same or similar to the previous one. 

Non-applicability of Limitation on carry forward of Tax Losses

The limitation on tax losses carried forward as per Article 39 will not apply where the shares of the Taxable Person are listed on the Recognised Stock Exchange.

It is an administrative simplification where it is assumed that entities that are listed on a Recognised Stock Exchange have maintained sufficient continuity and they will be able to utilize Tax Losses brought forward from prior Tax Periods. This is irrespective of the extent of changes in their ownership or activities. 

Can I transfer my Tax Loss to another Taxable Person under the UAE CT Law? 

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