The UAE’s domestic law currently allows losses to be carried forward indefinitely. Abu Dhabi, however, restricts the carry-forward of losses to 1 year only and allows the use of this carry-forward only once in every 5 years.
Effective 1 June 2023, the new UAE federal corporate tax regime introduced rules governing tax loss relief, restrictions, offset rules, etc., which are detailed below:
Tax losses can be carried forward indefinitely, but the amount of loss that can be offset against the taxable income of a subsequent tax year is restricted to 75% of the taxable income (before any tax relief) of each of the future tax years or any other percentage as may be prescribed by the Cabinet.
However, the following losses cannot be offset against taxable income:
- Losses incurred before the commencement of the corporate tax law, i.e., 1 June 2023;
- Losses incurred before a person becomes a taxable person under the new federal corporate tax regime; or
- Losses incurred on exempt income.
A tax loss or a portion thereof may be offset against the taxable income of another taxable person, provided all the following conditions are met:
- Both taxable persons are juridical persons;
- Both taxable persons are resident persons;
- Either taxable person has a direct or indirect ownership interest of at least 75% in the other, or a third person has a direct or indirect ownership interest of at least 75% in each of the taxable persons;
- The common ownership, as mentioned above, must exist from the start of the tax year in which the tax loss is incurred to the end of the tax year in which the other taxable person offsets the tax loss transferred against its taxable income;
- None of the persons are exempt persons;
- None of the persons are a qualifying free zone person;
- The financial year of each of the taxable persons ends on the same date; and
- Both taxable persons prepare their financial statements using the same accounting standards.
Where a taxable person transfers its tax loss to another taxable person:
- The taxable person to which the tax loss is transferred should reduce its taxable income for the relevant tax year;
- The total tax loss offset shall not exceed the amount allowed by the general tax loss rules (75% of taxable income or any other percentage as may be prescribed); and
- The taxable person should reduce its available tax losses by the amount of the tax loss transferred to the other taxable person for the relevant tax year.
Tax losses can be carried forward and utilized in accordance with the general tax loss rules provided any of the following conditions are met:
- The same person or persons must have continuously held at least 50% of the ownership interest in the taxable person from the beginning of the tax year in which the loss is incurred to the end of the tax year in which the loss or part thereof is offset against taxable income; or
- The taxable person must be engaged in the same or a similar business activity following a change in ownership of more than 50%.
Relevant factors for determining whether a taxable person is engaged in the same or a similar business activity include:
- The taxable person uses some or all of the assets as before the ownership change;
- The taxable person has not made significant changes to the core identity or operations of its business since the ownership change; and
- Any changes that occur in the business must be from developing or exploiting assets, services, processes, products, or methods that existed before the ownership change.
The limitation on loss carry-forwards does not apply to a taxable person whose shares are listed on a recognized stock exchange.