Carry forward of Tax Losses and set-off losses with profit in the future year(s) in UAE Corporate Tax Law.
In this article, we are going to explain the questions and explanations from the authorities regarding tax losses.
- Can one company set off their tax losses with taxable income (profit) in the future?
- Is there any limitation in the setting off of losses with profits?
- Is it mandatory to set off the carried forward losses in subsequent years against taxable income?
- What will happen if there are continuous losses in the business? How many years can the losses be carried forward?
- Can a company carry back the losses, meaning adjust the current year's loss with the previous year's profits?
- Are there any situations where a company cannot carry forward losses to future years?
Articles 37, 38, and 39 of the UAE Corporate Tax Law have explained the tax losses and their treatments. Before diving into the topic, keep in mind that loss is not an expense. This means the tax losses need to be adjusted with the taxable profit after all the necessary adjustments as per the UAE Corporate Tax Law. Corporate Tax payable needs to be calculated after setting off the previous year's tax losses.
Throughout this article, we have used examples to make your understanding better.
Can one company set off their tax losses with taxable income (profit) in the future?
As per Article 37 of the UAE Corporate Tax Law describes that a taxable person (both companies and natural persons who are either residents or non-residents) can carry forward the tax losses and set off with future taxable incomes. In this article, for easy understanding, we are using the word company instead of taxable person.
Is there any limitation in the setting off of losses with profits?
The maximum loss a company can carry forward and set off with taxable income is limited to 75% of taxable income. Example:- If a company has a tax loss of AED 100,000/- in the year 2024 and taxable income of AED 50,000/- in the year 2025, the maximum tax loss which can be set off is 75% of AED 50,000/- which is AED 35,000/-.
Below are the losses which a company cannot carry forward or set off with future profits.
- Losses before the starting of Corporate Tax. Example: - If a company has a tax loss in the year 2023 and their Corporate Tax period started from 01 January 2024, the losses incurred in the year 2023 cannot be carried forward for tax loss relief.
- Losses incurred before the person becomes a taxable person. Example: A natural person who has a business turnover of AED 800,000/- in the year 2024 is not a taxable person since a natural person who has a turnover of more than 1 million from business or business activities conducted in the UAE is considered a taxable person for Corporate Tax purposes (Cabinet Decision No.49 of 2023). Suppose the natural person incurred a loss in the year 2024 and in the year 2025 the person earned AED 1.5 Million and became a taxable person. As the natural person was not a taxable person in the year 2024, the losses incurred in the year 2024 cannot be carried forward.
- Losses from exempt activity or assets or from activities that are not considered for Corporate Tax purposes. Example: A company invested in another UAE company and incurred a loss in their investment. The dividend of capital gain received by a UAE company from another UAE company is exempt from Corporate Tax calculations. Thus, losses incurred from exempt income cannot be carried forward or set off with future profits. Read here to learn more about incomes that are exempt from UAE Corporate Tax.
Is it mandatory to set off the carried forward losses in subsequent years against taxable income?
Let us understand this through an example. If the company has a tax loss in the year, which is AED 200,000/-. In the year 2025, the company made a taxable income of AED 300,000/-. The company decided not to set off the previous year's tax losses because their taxable income is below AED 375,000/- and 0% Corporate Tax is applicable for taxable income up to AED 375,000. Is that allowed? The answer is no. if there is a previous year's tax loss, such loss must be set off with taxable income for the future year.
What will happen if there are continuous losses in the business? How many years can the losses be carried forward?
In the previous example, the tax loss adjusted with taxable income is AED 35,000/-. What will happen to the unutilized tax losses, which are AED 65,000/-? Such unutilized tax losses can be carried forward for an indefinite period. There are countries that have limited the number of years for carrying forward losses, like Croatia, Hungary, Poland, etc. The UAE authority has taken a generous approach to carrying forward losses and made it clear that the tax losses can be carried forward for an unlimited number of years.
Can a company carry back the losses, meaning adjust the current year's loss with the previous year's profits?
UAE Corporate Law does not allow companies to carry back the losses. Taxable losses can only be carried forward and set off with future taxable profits.
Are there any situations where a company cannot carry forward losses to future years?
Even though the Corporate Tax Law is giving an opportunity to carry forward the losses for an indefinite period, in certain situations the carryforward of tax losses is not permitted by the law. If both of the below are met, then tax losses cannot be carried forward.
- A company changed more than 50% of the ownership, and
- The company changed the business model to the extent that the identity of the business was changed.
Example: A company incurred a tax loss in the year 2024. In the year 2025, the shareholder sold 60% of its shares to a third party, and the company changed the activity from consultancy to furniture trading. In this case, the 2024 tax loss cannot be carried forward to 2025.
Important note: The above conditions are not applicable to companies whose shares are listed on the recognized stock exchange.
To learn more about Understanding Tax Loss Carry-Forward in UAE Corporate Tax, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.