With the implementation of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), understanding the treatment of tax losses has become a critical component of corporate tax planning. The ability to carry forward losses offers significant tax relief for businesses, especially in the early years of operation or during downturns.
This detailed guide explains how loss carry forward works under UAE Corporate Tax law, its conditions, limits, and strategic advantages. If you’re unsure how to claim or record tax losses properly, expert help from PEAK Business Consultancy Services can ensure your filings are fully compliant and tax-efficient.
1. What Is a Tax Loss?
A tax loss arises when a business’s allowable deductions exceed its taxable income during a specific financial year. In simple terms, if your operating expenses and eligible costs are greater than your income, you end up with a net tax loss.
Under the UAE Corporate Tax regime, these losses can be carried forward and offset against future taxable income, reducing the corporate tax burden in profitable years.
2. Legal Basis for Carry Forward of Losses
The right to carry forward losses is provided under Articles 37 to 39 of the UAE Corporate Tax Law. This is a valuable provision for startups and businesses that incur losses in the initial years of establishment or during business expansion.
Key provisions include:
- Losses can be carried forward indefinitely.
- Losses can be offset up to 75% of the taxable income in any future tax period.
- Losses can be transferred within a qualifying group (subject to conditions).
Example: If your business has AED 1 million in tax losses in Year 1, and AED 500,000 in taxable profits in Year 2, you can offset up to 75% of Year 2’s taxable income (i.e., AED 375,000), and carry the remaining losses forward to future years.
3. Who Can Carry Forward Losses?
Any taxable person under the UAE Corporate Tax law — including mainland companies, free zone entities (on non-qualifying income), and other registered businesses — may carry forward and utilize tax losses, provided they:
- Are subject to UAE corporate tax
- Have filed timely and accurate corporate tax returns
- Maintain proper accounting records as per tax law
PEAK Business Consultancy Services assists UAE companies in tracking and documenting tax losses to ensure their utilization in future tax years is legally valid and properly declared.
4. How to Use Carried Forward Losses
Losses can be used to offset a maximum of 75% of taxable income in future periods. This limitation prevents businesses from erasing their entire tax bill in high-profit years, promoting steady tax collection while still offering relief.
Example:
- Year 1 Loss: AED 2,000,000
- Year 2 Taxable Income: AED 1,000,000
- Maximum offset: 75% of AED 1,000,000 = AED 750,000
- Remaining taxable income: AED 250,000 (taxed at 9%)
- Remaining losses carried forward: AED 1,250,000
5. Loss Transfer Within Tax Groups
UAE Corporate Tax allows for loss transfer between group companies under certain conditions, such as:
- Ownership of at least 75% of the subsidiary
- Tax residency in the UAE
- No exemption or loss restriction for either party
Losses can only be transferred to group members who have taxable income and meet FTA eligibility criteria.
Setting up a tax group? PEAK Business Consultancy Services can help you structure tax groups and optimize intercompany tax efficiency across entities in the UAE.
6. Conditions for Retaining Losses
The law stipulates certain conditions to continue carrying forward losses over multiple years:
- No major change in ownership (more than 50%) and business activity
- Business must maintain continuity in operations and accounting records
- Losses must be reported accurately in tax returns
Violation of these conditions may result in the forfeiture of carried forward losses.
7. Restrictions on Carrying Forward Losses
While the regime is relatively generous, there are some restrictions:
- Losses incurred before the effective date of the corporate tax regime are not eligible for carry forward.
- Losses from exempt income (e.g., qualifying free zone income) cannot be used to offset taxable income.
- Losses from foreign branches may not qualify unless opted for tax inclusion in the UAE.
Ensuring losses are eligible requires careful assessment of their origin and associated income classification.
8. Recordkeeping and Documentation
To carry forward losses and utilize them, businesses must maintain:
- Complete and audited financial statements
- Tax computation sheets for each year
- Evidence of loss occurrence (income, expense, invoices, etc.)
- FTA-compliant tax return submissions
Errors or poor documentation can lead to disallowance of loss claims during audits.
9. Strategic Tax Planning with Loss Carry Forwards
Tax loss planning offers businesses the ability to:
- Smooth taxable income across years
- Reduce corporate tax liabilities during rebound years
- Improve post-tax profitability and cash flows
- Enhance financial projections for investors and banks
Proactive planning is crucial — especially when losses are expected or when shifting from loss to profit.
10. Conclusion
The carry forward of tax losses under UAE Corporate Tax offers valuable relief for businesses aiming for long-term profitability. With a 75% offset cap and indefinite carry forward window, this mechanism supports both startups and mature companies managing business cycles.
However, to maximize the benefit and ensure compliance, accurate documentation, legal structuring, and professional advisory are essential.
Need help calculating and utilizing your tax losses? Get professional support from PEAK Business Consultancy Services. As experienced VAT and Corporate Tax consultants in the UAE, we help you plan, report, and manage losses effectively within FTA guidelines.
