Tax Loss Relief: Carrying Forward Losses to Future Years under UAE Corporate Tax
The journey of any business includes periods of growth and, inevitably, times of challenge. In some years, a company’s deductible expenses may exceed its revenues, resulting in a “tax loss.” Recognizing that business cycles are a reality, the UAE Corporate Tax (CT) Law includes a crucial provision designed to support business resilience and encourage long-term investment: **Tax Loss Relief**.
- Tax Loss Relief: Carrying Forward Losses to Future Years under UAE Corporate Tax
- What is a Tax Loss and How Does Relief Work?
- Crucial Conditions for Carrying Forward Losses
- Strategic Tax Planning with Excellence Accounting Services (EAS)
- Frequently Asked Questions (FAQs)
- Don't Let Past Losses Go to Waste.
This mechanism allows businesses to carry forward the tax losses incurred in one financial period to offset against taxable profits in future years. In essence, it’s a way of ensuring that taxes are paid on a company’s long-term profitability, rather than penalizing it for a single difficult year. For business owners and financial managers, understanding how to utilize this relief is not just a compliance issue—it’s a critical component of strategic tax planning and cash flow management.
This guide provides a comprehensive explanation of the Tax Loss Relief rules under the UAE CT Law. We will cover the core principles, the specific limitations on how much you can offset, the conditions for carrying losses forward, and the strategic implications for your business.
Key Takeaways
- Losses Can Reduce Future Tax Bills: Tax Loss Relief allows you to carry forward a tax loss from one year to offset against taxable profits in subsequent years.
- The 75% Offset Limit: In any given year, you can only use your carried-forward losses to offset a maximum of **75%** of that year’s taxable income.
- **Indefinite Carry-Forward Period:** The UAE law is generous, allowing businesses to carry forward unused tax losses **indefinitely**.
- Strict Conditions Apply: To carry forward losses, especially after a change in ownership, you must meet specific “continuity of ownership” and “continuity of business” tests.
- Not All Losses Qualify: Losses incurred before the start of the Corporate Tax regime or from exempt activities cannot be carried forward. Expert corporate tax advice is vital.
What is a Tax Loss and How Does Relief Work?
A tax loss occurs when a company’s total tax-deductible expenses are greater than its total taxable income for a specific tax period. The resulting negative figure is the “tax loss.”
Tax Loss Relief is the process of using this loss to reduce your taxable income in a future, profitable year. This, in turn, reduces the amount of corporate tax you have to pay.
The Core Rule: The 75% Offset Limitation
The most important rule to understand is the cap on how much loss you can use in any single year. The amount of tax loss you can offset is limited to **75% of your taxable income** for that subsequent period.
Example:
- In 2025, ABC Trading LLC incurs a tax loss of **AED 200,000**.
- In 2026, the business has a profitable year and generates a taxable income of **AED 150,000**.
ABC Trading cannot use the full AED 150,000 of its loss to wipe out its profit. It is limited to 75% of the profit:
- Maximum Offset Amount: 75% of AED 150,000 = **AED 112,500**
- Adjusted Taxable Income: AED 150,000 – AED 112,500 = **AED 37,500**
- Tax Due for 2026: The company will pay corporate tax on AED 37,500.
- Remaining Loss to Carry Forward: AED 200,000 (original loss) – AED 112,500 (loss used) = **AED 87,500**. This amount can be carried forward to 2027 and beyond.
This rule ensures that profitable companies still contribute some tax revenue in any given year.
Crucial Conditions for Carrying Forward Losses
The ability to carry forward tax losses is not automatic. The law sets out important conditions, primarily designed to prevent the “trading” of companies purely for their tax losses.
1. Continuity of Ownership (The 50% Rule)
A business can carry forward its tax losses as long as at least **50% of its ownership remains unchanged** from the beginning of the period the loss was incurred to the end of the period the loss is utilized.
2. Continuity of Business
If the ownership of the company changes by **more than 50%**, the company can **still** carry forward its old tax losses, but only if it continues to conduct the **same or a similar business** as it did before the ownership change. A drastic change in the core business activity after a major ownership change will likely result in the forfeiture of past tax losses.
What Losses Cannot Be Carried Forward?
It’s important to note that certain losses are specifically excluded from this relief:
- Losses incurred before the effective date of the UAE Corporate Tax law.
- Losses generated from activities or assets that produce tax-exempt income.
- Losses incurred before a person was subject to Corporate Tax.
Strategic Tax Planning with Excellence Accounting Services (EAS)
Utilizing tax loss relief effectively is a key part of strategic financial management. The team at EAS provides expert guidance to ensure you maximize your eligible relief while remaining fully compliant.
- Corporate Tax Advisory: Our tax experts provide clear interpretations of the tax loss relief rules, including the continuity of ownership and business tests.
- Tax Compliance and Filing: We manage the preparation and filing of your corporate tax returns, ensuring that any carried-forward losses are correctly calculated, tracked, and applied.
- M&A Tax Due Diligence: As part of our due diligence services, we analyze the tax loss position of target companies to assess their value and usability post-acquisition.
- Outsourced CFO Services: Our strategic CFOs help you with long-term financial planning, modeling the impact of tax losses on future cash flows and profitability.
Frequently Asked Questions (FAQs)
The UAE Corporate Tax Law is very generous in this regard. You can carry forward tax losses **indefinitely** until they are fully utilized, provided you continue to meet the necessary conditions.
No. The UAE law only allows for the “carry forward” of losses to be used against future profits. It does not permit “carry back” to amend prior-year tax returns.
Within a Tax Group (where there is 75% or more common ownership and other conditions are met), losses from one group company can be used to offset the taxable profits of another group company in the same period. This is a powerful tool for managing the overall tax liability of the group.
No. The law provides an exception for companies whose shares are listed on a recognized stock exchange. These companies are not subject to the 50% continuity of ownership test.
You must maintain meticulous financial records that substantiate the income and expenses that resulted in the loss. This includes audited financial statements, invoices, receipts, and a clear accounting and bookkeeping trail. These records must be kept for at least seven years.
If you elect for Small Business Relief, you are treated as having no taxable income for that period. Consequently, any tax loss incurred in that period cannot be carried forward to future years. You must choose between taking the relief or carrying forward the loss.
The law does not provide a rigid definition. It is generally interpreted as continuing to operate within the same industry and offering similar products or services. A complete change from, for example, a manufacturing business to a real estate investment company would likely fail this test.
No. You can only transfer tax losses to another company within the same Tax Group, where strict common ownership (at least 75%) and other conditions are met. You cannot “sell” your tax losses to a third party.
You would apply the 75% rule to that smaller taxable income. For example, if you have AED 100,000 in losses and only AED 50,000 in profit, you can offset 75% of AED 50,000 (which is AED 37,500). You would pay tax on the remaining AED 12,500 and carry forward the remaining AED 62,500 of your loss.
Yes. The rules for tax loss relief apply to all “Taxable Persons,” which includes both juridical persons (companies) and natural persons who are subject to Corporate Tax because their business turnover exceeds AED 1 million in a calendar year.
Conclusion: A Vital Tool for Business Sustainability
Tax Loss Relief is more than just a technical provision in the tax code; it is a fundamental support mechanism for businesses in the UAE. It acknowledges the realities of the economic cycle and provides a pathway for companies to recover from difficult periods and build long-term, sustainable profitability. By understanding and correctly applying these rules, businesses can better manage their cash flow, make more informed strategic decisions, and navigate their growth journey with greater financial resilience.
Don't Let Past Losses Go to Waste.
Contact Excellence Accounting Services for expert guidance on UAE Corporate Tax compliance and strategic tax planning.
