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Understanding the Tax Loss Provisions in the UAE6 min read

Author: Malavika Kolera
Manager - Tax & Compliance

The Federal Decree Law No. 47 of 2022 has introduced important changes in the UAE tax landscape. Here, we dive deeper into the nuances of the tax loss provisions, simplifying them for businesses and taxable individuals. Let’s break it down.

Overview of Tax Loss Provisions

The Decree Law offers leeway to Taxable Persons to utilize their preceding year’s tax losses.
The essential features of these provisions are:
– Tax losses from the past year can be adjusted against subsequent tax periods’ taxable income.

– If not fully utilized, tax losses can be transferred to subsequent tax periods.

 

However, not all tax losses can be set off. The exclusions include:

1. Losses from before 1st June 2023.

2. Losses experienced before becoming a taxable entity under the Decree Law.

3. Losses stemming from assets or ventures whose income is exempt or excluded under this Decree Law.

Article 37(2) - Limitation on Tax Loss Offset

The amount of tax loss that can be offset subsequently is restricted to 75% of the Taxable Income for that tax period before applying for this relief.

Carrying Forward Tax Losses: Insights from Article 39

The good news is that any unutilized tax loss that exceeds the above limit can be transferred forward. However, there’s an exception for businesses listed on any Recognized Stock Exchange. To leverage this provision, both these conditions should be met:

1. A consistent 50% ownership interest in the Taxable Person by the same Person/(s) from the Tax periods when the tax loss occurred till its offset.

2. The Taxable Person should engage in the same or a similar business post any ownership alteration above 50%.

 

Article 39(2) elaborates on determining if an entity conducts the same or a comparable business/activity.

Article 38 - Transferring Tax Loss Between Entities

The Decree Law allows a Taxable Person to relay their tax loss for a given period to another Taxable Person for that same period. This comes with its set of stipulations to qualify.

 

The Sequence of Tax Loss Offset

When setting off taxable income, the Taxable Person should follow this sequence:

1. Offset against their carried-forward tax loss as mentioned in Article 37(4).

2. Offset against tax loss transferred from other taxable entities as per Article 38. The entity transferring its tax loss will reduce it by an equivalent amount.

3. Transfer any remaining tax loss as guided by Article 39.

 

Tax Groups: Ministerial Decision No. 125 of 2023

The limitations stated in Article 37(2) of the Decree Law are applicable for pre-grouping losses of subsidiaries under tax groups, as elucidated in the Tax Group provisions.

 

The Federal Decree-Law No. 47 of 2022 is vital legislation that can significantly impact businesses. Understanding and applying these provisions correctly is crucial to maximizing benefits and ensuring compliance.

Taxation can often be intricate, with various provisions and nuances that can profoundly impact your business, and you might consider seeking specialized expertise to navigate these complexities efficiently.

Explore our Tax Consulting Services to understand how our tailored solutions can propel your business forward while ensuring you stay compliant.

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