Article (37) of the Corporate Tax Law, titled "Tax Loss Relief," allows a Taxable Person to deduct a Tax Loss from Taxable Income in subsequent Tax Periods. This deduction is not unlimited, however: the Law caps the amount of Tax Loss that can be used in any Tax Period at 75% of Taxable Income before applying any Tax Loss relief, and Article (38) also allows a Tax Loss to be transferred to another Taxable Person under set conditions.

The 75% Cap on Using a Tax Loss

Clause (2) of Article (37) provides that the amount of Tax Loss used to reduce Taxable Income for any subsequent Tax Period may not exceed 75% of Taxable Income for that period before applying any Tax Loss relief, or any other percentage the Cabinet may set, except in cases the Cabinet may specify by a decision issued on the Minister's proposal, in which this cap may not apply. This means that, as a general rule, a Taxable Person cannot reduce its Taxable Income to zero solely through carried-forward losses; it remains liable for tax on at least 25% of its income for that period, unless the Cabinet sets a different percentage or specifically excepts that case from this cap.

Losses That Cannot Be Carried Forward

A Taxable Person may not claim Tax Loss relief for: losses incurred before Corporate Tax was imposed in the first place; losses incurred before the person became a Taxable Person under the Law; or losses incurred from assets or activities whose income is exempt or otherwise disregarded under the Law.

Transferring a Tax Loss to Another Taxable Person (Article 38)

Article (38) allows a Tax Loss, or part of it, to be deducted from the Taxable Income of another Taxable Person, provided both are juridical persons and Residents, neither is an Exempt Person or a Qualifying Free Zone Person, and one owns at least 75% of the ownership interests in the other, or a third party owns at least 75% of both, directly or indirectly, with that ownership continuing from the start of the period the loss was incurred until the end of the period it is deducted. The Law also requires both Taxable Persons' Financial Years to end on the same date and both to prepare their financial statements using the same accounting standards, ensuring their financial results are comparable when the loss transfer takes place.

Order of Using Carried-Forward Losses

The Law requires Tax Losses carried forward from a previous period to be deducted from Taxable Income of the following period first, before carrying forward any remainder to a later period or using any Tax Loss transferred from another Taxable Person under Article (38). In other words, a Taxable Person's own losses are used up first, in the order they were incurred, before resorting to losses acquired from another party through a transfer. This ordering is meant to simplify the tax computation and prevent any circumvention of the 75% cap set out in Article (37) by choosing between different sources of losses.

Illustrative Example

If a Taxable Person has Taxable Income for a given period before applying any Tax Loss relief, and it has Tax Losses carried forward from previous periods sufficient to absorb the maximum permitted percentage, the most it can deduct from those losses in that period is 75% of that Taxable Income, leaving 25% of the income subject to tax as a general rule, even if the available losses are far larger than that, unless the Cabinet sets a different percentage or excepts that case from this cap.

Legal References

For questions about your specific situation, you can ask the UAE Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.