Transfer of Corporate Tax Losses under UAE Tax Law

Corporate tax loss arises when the allowable business expenses of a company exceed its taxable income, whereby the company incurs a negative taxable income for a particular year of taxation. The loss can be carried forward to offset future profits or carried back to previous years' profits thereby reducing tax liability for those previous years.

If your business in the UAE makes less money than it spends in a certain period (tax period), that's called a tax loss. This guide explains how CorporateTax Losses work in the UAE and what you can do with them.

What Constitutes a Corporate Tax Loss:

• A Corporate tax loss takes place when the sum of expenses of an enterprise, which includes operating costs, depreciation, and interest costs, exceeds its income for the year with a negative taxable income.
• These losses essentially signify a reduction in the financial capabilities of a firm to pay taxes but may often lead to tax relief in future years.

What is a Tax Loss?     

Imagine your business income for a period is AED 100,000 and your expenses are AED 120,000. In this case, you have a tax loss of AED 20,000 (120,000 - 100,000).

Using CorporateTax Losses to Reduce Future Taxes

The good news is that you can use tax losses to reduce your taxes in future periods. This is called "carrying forward" your tax loss. It's like saving your loss to use against future profits, lowering your overall tax bill.

There's a Limit, Though

There's a catch: you can only use up to 75% of your taxable income in any future period to offset your tax loss. Let's say you have a tax loss of AED 20,000 and your future taxable income is AED 40,000. In this case, you can use AED 30,000 (75% of 40,000) of your tax loss to bring your taxable income down to AED 10,000 (40,000 - 30,000). You'll still have AED 10,000 (20,000 - 30,000) of tax loss left to carry forward to the next tax period.

Keeping Your Business Going Matters

There are also some rules about how long you can carry forward a tax loss. You can generally only do this if your business continues to operate in a similar way. Imagine you run a clothing store and you make a loss. You can carry forward that loss if you keep running a clothing store, even if you change the location or name. But if you start selling something completely different, like electronics, you might not be able to use your old tax loss.

Exceptions to the Rules

There are some exceptions to these rules. For example, if your business is listed on a recognized stock exchange, you can carry forward your tax loss even if you make big changes to your business.

Thinking of Buying a Business with Tax Losses?

If you're thinking of buying a business with Tax losses, be careful. You might not be able to use those losses unless the business keeps operating in a similar way.

Key Terms Connected with Corporate Tax Losses:

Net Operating Loss (NOL):

A NOL is defined as the amount by which business allowable costs exceed taxable income, which in itself forms a loss that either can be carried forward or backward to reduce taxes in subsequent years.

Carryforward:

A carryforward refers to the use of a loss in the current year for tax purposes in order to offset taxable income in future years. Therefore, this cuts down on tax liability in future years due to profits.

Carryback:

Carryback: Under this method, a firm can apply its current year's tax loss to offset taxable income within prior years, which may yield tax refunds for those prior years.

Tax Credit vs. Tax Loss:

A tax credit reduces the amount of tax liability directly; whereas, tax loss offsets future taxable income.

Corporate tax losses aid a firm to recover from periods of low incomes and provide tax relief over time.

Corporate Tax Loss Offsets

Corporate tax loss offsets allow businesses to use losses during the current year to absorb taxable income in future years and reduce their entire tax payable when profits do pick up again.

Offsetting Corporate  Tax Losses Against Future Taxable Income:

This is possible through the Corporate tax loss carryforward process whereby tax losses carried forward into future taxable incomes reduce future tax bills by calculating past losses deducted from taxable profits in later years, thus acting as a buffer during profitable times.

Companies can offset cash flow and financial stability, especially after trying times of economic problems, whereby future profits are used to offset losses from previous years through which companies operate.

Rules on off-setting Corporate losses against taxable profits:

• Corporate tax loss Carryforward: Many tax laws allow losses to be carried forward into the following year for an infinite number of years or a specific number of years of the relevant tax jurisdiction. In some countries, for instance, losses can be carried forward for 10 years and are treated as having lapsed if they remain unused after that period.
• Corporate tax loss Carryback: Some tax jurisdictions allow firms to recover previous years' profits through carryback rules whereby losses are applied against profits made in earlier years, which can then trigger a return of tax paid for those prior years.
• Limits on Offsets: Certain tax systems limit the amount of loss that may be offset in any particular year-for example, by limiting offsets as a percent of taxable income which would provide an 80% limit and otherwise prohibit the entire tax liability from being nullified.

Particular Situations to Which Losses Can't Offset

• Sources of Exempt Income: Generally, losses can't be used to offset income from exempt sources because that source isn't taxed.
• Capital Gains Restrictions: This has the effect that business losses cannot be used in certain situations to offset capital gains. Specific rules may prevent the use of net capital losses to offset only capital gains and not general taxable income.
• Ownership Change Restrictions: In some countries, changes in ownership in a business enterprise (such as mergers and acquisitions) mean that previous losses cannot be used to offset future income.

Such provisions aim to prevent companies from taking undue advantage of tax loss offsets while still allowing actual loss recovery in future profitable years.

Keeping of Records and Filing Requirements

Corporate Tax Loss Documentation for Carry-over/Carry Forward:

• Pre-Advance Accounting Statement: All the documents of income, and expenditure losses including the Balance sheet, Profit and Loss Statement, Statement of Cash Flow
• Tax Filings Loss Computation: Businesses are required to include straightforward documentation on their tax returns stating how they calculated their losses for the year.
• Supporting Documents for Expenses: Invoices, receipts, and contracts showing incurred and deducted expenses which will establish the loss amount.
• Carryforward Schedules: Comprehensive Schedules, showing the loss amount that is carried forward, which tax year loss occurred in, and how much is utilized in subsequent years.. 

Compliance Requirements, Including Reporting and Auditing Standards:

• Accurate Record Keeping: Firms should constantly update the records in order to be fully informed about the uses of losses accurately and properly to meet the accepted standards of local tax authorities.
• Annual reporting requirement: Most tax authorities require that loss carryforwards be reported each year they are utilized with the exact amount being offset against taxable income.
• Auditing Standards: The losses and carryforward claims may sometimes be audited, depending on the considerable savings in tax. Compliance with audit standards or GAAP/IFRS is important to ensure this.
• Ownership and Business Continuity: Other jurisdictions impose specific requirements for additional documentation in cases of change in ownership to demonstrate continuity of business operations since previous losses cannot be allowed to be claimed under new ownership.

Any business must satisfy the filing and bookkeeping requirements for it to be able to exercise its rights of loss carry-forward without risking penalties or disallowing claims.

Impact of Corporate Tax Losses on Financial Statements

How Corporate Tax Losses Affect a Company’s Financial Statements and Tax Liabilities:

• Income Statement: The impact is in the form of an investment in negative taxable income, thus directly reducing earnings or triggering a net loss for the period. Directly reduces profitability measures such as EPS.
• Balance Sheet: Losses will create a deferred tax asset if it feels it is probable that it can recover those losses someday in the future to adjust taxable income. Deferred tax assets are nothing but potential tax advantages and enhance the future cash inflow estimates and financial comfort in the years ahead when profits are being reported.
• Cash Flow Statement: Tax Losses Although tax losses reduce net income, the cash flows may not be reduced. When these losses carry forward for several years, for example, they begin to increase tax payments in future profitable years to make up for the lost taxes, which reduces future cash flow.
  

Importance of Accurate Reporting to Reflect the Financial Impact of CorporateTax Losses:

• Transparency and Investor Confidence: Correct disclosures over loss enable stakeholders to have the perspective of understanding the financial health of the company, strength, and a way out of non-profitability. Accurate record-keeping of deferred tax assets assures the investor of the potential tax benefits that can improve later financial performance.
• Tax Compliance: Accurate records increase compliance towards taxes, especially when losses are utilized for tax loss carryforwards. Errors associated with reporting losses or deferred tax assets attract fines, intensified scrutiny, and denial of tax benefits.
• Strategic Financial Planning: The accurate reporting of losses enables the visualization of tax offsets available to be utilized by the company in relation to investment, acquisitions, and associated financial strategies.

Accurate accounting of tax losses will enhance credibility in financial statements and serve as a further catalyst for regulatory compliance and strategic planning for sustainable growth.

How Can Resyon Badger Help?

Tax laws can be complicated. If you have questions about CorporateTax losses or anything else related to UAE corporate tax, it's always a good idea to talk to a tax advisor. 

Reyson Badger offers highly knowledgeable and experienced tax consultants in the UAE, dedicated to providing clients with top-tier Corporate Tax services. Our expertise ensures that clients remain compliant with the Tax Authority laws and regulations.