Khaleej Times' has launched a new initiative to offer readers expert insights about the impact of VAT and Corporate Tax on UAE’s business environment. Here is another expert view:
What are ‘Tax Losses”?
A loss for corporate tax purposes (Tax Loss) would arise when the total deductions a business can claim are greater than the total income that is subject to tax for the relevant tax period, resulting in negative taxable income.
Will a group be able to utilise the tax losses of one group company against the taxable income of another group company?
Tax losses from one UAE group company may be used to offset taxable income of another UAE group company where there is 75 per cent or more common ownership and certain other conditions are met.
No tax loss transfers will be allowed from companies that are exempt or that benefit from the zero per cent free zone corporate tax regime.
What are the conditions for the transfer of tax losses within a group?
The UAE companies must meet the following conditions to transfer an amount of tax losses from one company to another in the same Tax Period:
1. Both companies are UAE resident juridical persons;
2. Either owns 75 per cent or more of the other, or a third party owns 75 per cent or more of both entities and this ownership existed at the start and end of the tax period in which the loss was incurred;
3. Neither company is an exempt person;
4. Neither company is a qualifying free zone business; and
5. The financial statements must be prepared using the same accounting standards, and using the same financial year.
Will a change in ownership of the taxable person restrict the ability to use its tax losses?
Tax losses can be carried forward without limitation provided the same person or persons continue to own at least 50 per cent of the entity with the losses. Where there is a greater than 50 per cent change in ownership, tax losses may still be carried forward provided there is no major change in the nature or conduct of the entity's business.
Will the UAE corporate tax regime allow prior year tax losses to reduce taxable income?
Tax losses can, subject to certain conditions, be offset against the taxable income of future periods, up to a maximum of 75 per cent of the taxable income in each of those future periods. Any excess (unused) tax losses can be carried forward and used against taxable income of future tax periods indefinitely.
Example: A taxpayer has taxable income of Dh360,000 and carried forward losses of Dh300,000. It can offset (75 per cent x Dh360,000) = Dh270,000 of its losses carried forward in the relevant tax period, reducing its taxable income to Dh90,000.
The amount of tax losses available for carry forward to subsequent tax periods would reduce to Dh30,000 (Dh300,000 — Dh270,000).
About the expert
Pankaj Mundra is past chairman of ICAI Dubai Chapter and co-founder of 360tf — a Global Supply Chain Finance Platform. He is an eminent chartered accountant and holder of a postgraduate in Management.
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For those with tax-related queries or who simply wish to stay informed on how the new laws and changes might impact them, Khaleej Times is here to help. Questions can be sent to taxquery@khaleejtimes.com or inquiries can be made by calling +971-4-3384545.
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