Table of Contents
- Why Was Article 39 Introduced?
- 1. Ownership Continuity Test
- Practical Example – Restricted Scenario
- Year 1
- Year 2
- 2. Business Continuity Test
- How Is “Same or Similar Business” Determined?
- a) Use of Same Assets
- b) No Significant Change in Core Operations
- c) Normal Business Development is Allowed
- Practical Example
- Before Ownership Change
- After Ownership Change
- Listed Companies Are Exempt
- Interaction with Article 37
- Formula
- Combined Practical Illustration
- Year 1
- Year 2
- Year 3
- Conclusion
Under the UAE Corporate Tax Law, businesses are generally allowed to carry forward tax losses and use them against future taxable profits. However, Article 39 introduces important anti-abuse rules to ensure that tax losses are used only by the businesses that genuinely incurred them.
In simple terms, Article 39 prevents companies from buying loss-making businesses purely to use their accumulated tax losses and reduce future taxes. This practice is commonly referred to as “tax loss trafficking.”
Why Was Article 39 Introduced?
The UAE Corporate Tax system allows businesses to carry forward losses indefinitely, subject to the 75% utilization limit under Article 37. However, without restrictions, profitable businesses could simply purchase companies with large accumulated losses to reduce their tax liabilities unfairly.
Therefore, Article 39 introduces two important continuity tests:
- Ownership Continuity Test
- Business Continuity Test
1. Ownership Continuity Test
Article 39 states that tax losses can continue to be utilized only if the same person or group of persons continuously own at least 50% of the company from:
- The beginning of the Tax Period in which the loss was incurred, until
- The end of the Tax Period in which the loss is utilized.
Formula
Continuous Ownership Requirement ≥ 50%
Practical Example – Restricted Scenario
Year 1
XYZ LLC incurs a tax loss of AED 2,000,000.
| Shareholder | Ownership |
| Mr. A | 70% |
| Mr. B | 30% |
Year 2
Mr. A sells all shares to a new investor.
| Shareholder | Ownership |
| New Investor | 70% |
| Mr. B | 30% |
In this case, more than 50% ownership changed. Therefore, the company may lose the ability to use carried forward losses unless the “same or similar business” condition is satisfied.
2. Business Continuity Test
Even where ownership changes by more than 50%, tax losses may still survive if the company continues the same or similar business activity after the ownership change.
This rule recognizes that genuine business acquisitions and restructurings happen commercially and should not automatically result in loss denial.
How Is “Same or Similar Business” Determined?
Article 39 provides several factors to determine whether the business remains substantially the same.
a) Use of Same Assets
The company continues using some or all of the same business assets after ownership change.
b) No Significant Change in Core Operations
The company should not substantially change its core identity or operations.
Example – Continuity Failed
| Before Change | After Change |
| Restaurant business | Real estate trading |
The company completely changed its business activity. In such a case, tax losses may no longer be available.
c) Normal Business Development is Allowed
The law recognizes that businesses naturally evolve over time.
A business may:
- Improve products
- Develop services
- Upgrade processes
- Introduce new technology
without losing tax losses, provided these developments are linked to the original business.
Practical Example
Before Ownership Change
A software company develops accounting software.
After Ownership Change
The company expands into cloud-based accounting platforms using the same technical expertise and customer base.
This may still qualify as a similar business because it represents normal commercial development rather than a completely different activity.
Listed Companies Are Exempt
Article 39 specifically states that these restrictions do not apply to companies listed on a recognized stock exchange.
This exemption exists because ownership in publicly traded companies changes frequently in the normal course of market trading.
Interaction with Article 37
Article 39 does not independently grant tax loss relief. Instead, it places limitations on the losses otherwise available under Article 37.
Therefore, even if Article 39 conditions are satisfied:
- Loss utilization still remains subject to the 75% limitation under Article 37.
Formula
Maximum Tax Loss Utilisation=75%×Taxable Income Before Loss ReliefMaximum Tax Loss Utilisation=75%×Taxable Income Before Loss Relief
Combined Practical Illustration
Year 1
DEF LLC incurs tax losses of AED 5,000,000.
Year 2
70% ownership changes to a new investor.
However:
- Same manufacturing business continues.
- Same factory assets are used.
- Same products continue to be produced.
Therefore:
- Business continuity test may be satisfied.
- Tax losses may still survive.
Year 3
Taxable income = AED 2,000,000.
Maximum allowable utilization:
75% of 2,000,000 = 1,500,000.
| Particulars | AED |
| Taxable Income | 2,000,000 |
| Maximum Loss Utilization | (1,500,000) |
| Remaining Taxable Income | 500,000 |
The remaining carried forward loss continues into indefinite future periods.
Conclusion
Article 39 of the UAE Corporate Tax Law acts as an anti-avoidance safeguard to prevent misuse of tax losses through artificial ownership transfers. At the same time, the law recognizes genuine commercial restructurings by allowing continued utilization of losses where the same or similar business continues.
The Article mainly focuses on:
- Maintaining at least 50% ownership continuity, OR
- Demonstrating continuation of the same or similar business activity
Businesses planning mergers, acquisitions, restructurings, or shareholder changes should carefully evaluate Article 39 to avoid unintentionally losing valuable carried forward tax losses.
