With a new tax regime in the UAE, businesses will now be liable to pay taxes on their profits. The standard rate of corporate tax is 9% for businesses earning over AED 375,000 in a tax year. However, there is a 0% tax rate for entities with taxable income of up to AED 375,000. On the other hand, what if there is a loss? Keep calm; there is relief for the tax losses. In this blog, we look at managing corporate tax losses for businesses operating in the UAE. The tax law provides in-depth guidance on the subject. Let’s start with some basics.
Managing Corporate Tax Losses
Every business strives to earn money and thus be in profit. However, there are circumstances where an organization might be at a loss.
What is a Corporate Tax Loss?
A tax loss, as defined by the tax law, is any negative taxable income calculated under the provisions of the tax law for a given tax period. In simple words, when allowable expenses, or tax deductions, are higher than the revenue in a tax period, it will result in a tax loss. In case of a tax loss, a business can either;
1) Claim tax loss relief (Article 37).
2) Transfer tax loss (Article 38).
Let’s understand both scenarios in a bit of detail.
Tax Loss Relief
As per Article 37 of the tax law, a tax loss can be taken to subsequent tax periods and set off against the taxable income. This will enable entities to reduce their taxable income in subsequent years and thus reduce their tax liability. However, the point to ponder is that we can offset loss for a maximum of 75% of the taxable income (before loss relief) in subsequent tax periods.
The carryforward tax loss to a subsequent tax period shall set off against that period only. If there is any remaining tax loss, the business should carry it forward to the next subsequent period. Carry-forward tax losses are set off first if there are any tax losses transferred under Article 38 of the tax law. This shows why managing corporate tax losses is crucial for businesses operating in the UAE region.
There are circumstances when a taxable person cannot claim tax loss relief.
1) when a business has losses before the commencement of the corporate tax regime.
2) when a business has losses before becoming a taxable person under the corporate tax law.
3) when the loss is from an asset or an activity that is exempt under the decree-law.
Transfer of tax losses
As per Article 38 of the tax law, a taxable person can transfer their tax losses to another taxable person. However, there are conditions that the taxable persons or businesses need to meet. Managing corporate tax losses requires businesses to understand these conditions.
1) Both taxable persons are legal entities.
2) Both businesses are residents.
3) Either one of the taxable entities has a direct or indirect ownership stake of at least 75% in the other entity. Or a third party holds a direct or indirect ownership stake of at least 75% in both entities.
4) The shared ownership mentioned in point (3) above must be present throughout the entire tax period in which the tax loss occurs, until the end of the tax period in which the other taxable entity offsets the tax loss against its taxable income.
5) None of the entities are exempt from taxation.
6) None of the entities qualify as a qualifying free zone person.
7) Both entities have the same fiscal year-end date.
8) Both entities use the same accounting standards when preparing their financial statements.
Note that the tax loss offset shall not exceed the amount permissible as per Article 37 of the tax law. The taxable person receiving the tax losses must reduce their taxable income for the relevant tax period. However, the taxable person transferring the tax loss must reduce its available tax losses by the amount of tax loss transferred to another taxable person.
Conclusion
Managing corporate tax losses is as important as managing other tax responsibilities. This is because it is a relief that the UAE gives to the businesses that are underperforming. Mainly, there are two forms of relief: to claim tax loss relief and to transfer tax loss. Under the tax loss relief, an entity can carry forward its tax losses to subsequent tax years. On the other hand, an entity can transfer its tax losses to another entity meeting certain conditions. Organizations that operate in the UAE must keep themselves updated with the relevant laws and regulations. This in turn will make them take maximum benefit out of the reliefs, plus they will avoid hefty penalties.
Creative Zone Tax & Accounting (CZTA)
At CZTA, we not only do the right things, we do the best things for your business. Stuck anywhere or confused about where to start? Call us or visit us anytime. Our team works strenuously and smartly to make the best use of your tax losses and other tax reliefs available. No tax losses; you can still contact us for available reliefs relevant to your business and other tax matters. Contact us today.
