When it comes to running a business, profitability is often the ultimate goal. However, it’s important to recognize that financial losses—while seemingly undesirable—can play a surprisingly beneficial role, especially from a UAE Corporate tax perspective. Whether you’re just starting out, expanding operations, or weathering economic challenges, periods where expenses exceed income are common in the lifecycle of most businesses.
Did you know that losses could help reduce your tax liabilities? In the UAE, Corporate Tax (CT) regulations provide mechanisms that allow businesses to offset losses against taxable income from future years, offering a silver lining during tough times.
How Can Corporate Tax Help You If You Are Making Losses?
The UAE Corporate Tax law aims to ensure consistency and fairness in taxation, regardless of a business’s profitability over time. This principle allows businesses to smooth out the impact of their financial performance on tax obligations. As outlined in the Explanatory Guide to UAE CT law, losses incurred during one tax period can be carried forward and offset against future taxable income, provided certain conditions are met.
This mechanism ensures that businesses are taxed fairly across their lifetime, resulting in a balanced approach to taxation. Essentially, you’re not penalized for the timing of your profits or losses.
Ways Corporate Tax Can Help with Losses:
- Losses carry-forward (Articles 37 and 39 of CT law)
If your business incurs losses in a given tax year, you can carry these losses forward to offset future taxable income. Here’s what you need to know:
- The maximum offset amount is the lower of 75% of the subsequent year’s income or the loss amount.
- Shareholders must maintain at least 50% of their ownership stake; otherwise, the business must retain the same activities.
This means your losses from today could reduce your taxable income tomorrow—helping you reinvest in growth instead of paying higher taxes.
- Losses transfer to another company (Article 38 of CT law)
If your business has remaining losses after offsetting, these can be transferred to a sister company or subsidiary, provided they meet the following conditions:
- The maximum offset amount is the lower of 75% of the receiving entity’s income or the loss amount or any other lower amount (so you can choose!).
- A minimum of 75% direct or indirect common ownership.
- Only resident companies can benefit from this provision. Sole establishments, branches of foreign entities, and unincorporated partnerships are excluded.
- Both companies must follow the same accounting standards and have the same financial year-end.
- This provision is not available to Qualifying Free Zone Entities or Exempt entities (such as government entities, certain charities, natural resources extraction and non-extraction businesses, investment funds and some other entities).
- Both companies, receiving and surrendering losses, should follow the same accounting standards and have the same accounting year end.
This provision encourages corporate, so called ‘qualifying’ groups to optimize tax liabilities collectively, enabling better financial planning across the group.
What to do with the losses incurred prior to Corporate tax introduction?
Unfortunately, you cannot use losses that your business incurred before UAE Corporate tax was introduced (that is before 1 June 2023) or before your business registered for Corporate tax. Business can only take into account losses that came to surface after the date Corporate tax came into play. Similarly, if losses relate to the income that is considered exempt from UAE Corporate tax or is not included into the Corporate tax calculations, such losses cannot be utilised.
From a tax perspective, losses are not as negative as they may seem. They provide an opportunity to strategize, optimize, and reduce future tax liabilities.
At Bespoke Accounting, we specialize in helping businesses navigate complex tax regulations and turn challenges into opportunities.
Whether you’re exploring ways to carry forward losses, transfer them within your group, or optimize your tax strategy, we’re here to provide tailored solutions. Contact us today to learn how our expertise in bookkeeping, tax, and corporate services can help your business thrive—even during challenging times.