Table of Contents
- What is a Tax Loss?
- Simple Example
- Key Provisions of Article 37
- 1.Carry Forward of Tax Losses
- Practical Example:
- 2. 75% Utilisation Limitation
- Formula
- Practical Example
- Tax Computation
- 3. Losses That Cannot Be Claimed
- a) Losses Before Corporate Tax Started
- Example
- b) Losses Before Becoming a Taxable Person
- Example
- c) Losses Relating to Exempt Income
- Practical Example
- 4. Mandatory Order of Utilisation
- Example
- Important Business Implications
- Cash Flow Benefit:
- Support for Startups and Growing Businesses
- Proper Record Keeping is Essential
- Interaction with Article 39 – Continuity Conditions
- Example
- Conclusion
The introduction of Corporate Tax in the UAE brought an important relief mechanism for businesses known as Tax Loss Relief under Article 37 of the UAE Corporate Tax Law. This provision helps businesses reduce future tax burdens by allowing losses incurred in one year to be utilized against profits earned in future years.
In simple terms, if a business makes a loss today, the law allows that loss to be carried forward and adjusted against future taxable profits, subject to certain conditions.
What is a Tax Loss?
A Tax Loss arises when the allowable deductions and expenses of a business exceed its taxable income during a Tax Period.
Simple Example
| Particulars | AED |
| Revenue | 500,000 |
| Allowable Expenses | (650,000) |
| Taxable Result | (150,000) |
In the above example, the company has incurred a Tax Loss of AED 150,000.
This loss can generally be carried forward and used to reduce taxable profits in future years for indefinite period.
Key Provisions of Article 37
1.Carry Forward of Tax Losses
Article 37 allows a Taxable Person to offset current year losses against taxable income of future Tax Periods.
Practical Example:
| Year | Particulars | – AED |
| 1 | Tax Loss | (400,000) |
| 2 | Taxable Profit | 500,000 |
The company can utilize the carried forward tax loss against Year 2 profits, subject to the 75% limitation discussed below.
2. 75% Utilisation Limitation
One of the most important rules under Article 37 is that tax losses cannot reduce taxable income by more than 75% in a future year.
Formula
Maximum Tax Loss Utilisation = 75% of Taxable Income Before Loss Relief
Practical Example
Therefore, maximum allowable offset:
75% of taxable income 500,000 = 375,000. Although having the carried forward loss of AED 400,000
Tax Computation
| Particulars | AED |
| Taxable Income before relief | 500,000 |
| Less: Allowed Tax Loss Relief | (375,000) |
| Remaining Taxable Income | 100,000 |
The remaining unused loss of AED 25,000 can still be carried forward to future years.
This rule ensures that at least 25% of taxable income remains taxable in a given tax period.
3. Losses That Cannot Be Claimed
Article 37 specifically disallows certain losses from being utilized.
a) Losses Before Corporate Tax Started
Losses incurred before the UAE Corporate Tax regime became effective cannot be carried forward.
Example
If a company incurred losses in 2022 before UAE Corporate Tax became applicable, those losses cannot be used against taxable profits after Corporate Tax implementation.
b) Losses Before Becoming a Taxable Person
Losses incurred before a person becomes subject to UAE Corporate Tax are not eligible.
Example
A foreign company starts UAE operations in 2025 and becomes taxable from 2025 onward. Losses incurred outside the UAE before registration cannot be utilized under UAE Corporate Tax.
c) Losses Relating to Exempt Income
Losses arising from exempt income or non-taxable activities cannot be used for Tax Loss Relief.
Practical Example
Dividend income from a qualifying participation may be exempt from Corporate Tax. If expenses or losses relate to that exempt investment activity, such losses cannot be used to reduce taxable business income.
| Particulars | AED |
| Exempt Dividend Income | 200,000 |
| Related Investment Loss | (50,000) |
The AED 50,000 loss cannot be claimed for Tax Loss Relief purposes because the related income itself is exempt.
4. Mandatory Order of Utilisation
Article 37 also provides that carried forward tax losses must first be adjusted against the taxable income of the next Tax Period before carrying any balance forward further.
This means businesses cannot selectively skip years.
Example
| Year | Taxable Income/(Loss) | Treatment |
| Year 1 | (500,000) | Loss carried forward |
| Year 2 | 200,000 | Loss must be utilized |
| Year 3 | 600,000 | Remaining balance utilized |
The business cannot decide to ignore Year 2 and use the losses only in Year 3.
Important Business Implications
Cash Flow Benefit:
Tax loss relief helps businesses preserve cash flow during difficult years because future tax liabilities can be reduced.
Support for Startups and Growing Businesses
Many startups incur losses in initial years due to setup costs, marketing expenses, and expansion activities. Article 37 provides future tax relief once profitability improves.
Proper Record Keeping is Essential
Businesses should maintain:
- Financial statements
- Tax computations
- Supporting invoices and expense documents
- Schedules of carried forward losses
These records may be requested by the Federal Tax Authority (FTA).
Interaction with Article 39 – Continuity Conditions
Although Article 37 allows loss carry forward, Article 39 imposes additional conditions, particularly where there is a major ownership change. Generally, at least 50% ownership continuity may be required unless the business activity remains substantially the same.
Example
If shareholders of a loss-making company completely change and the company also changes its business activity, previously accumulated losses may no longer be available.
Conclusion
Article 37 of the UAE Corporate Tax Law is a significant relief provision that allows businesses to carry forward tax losses and offset them against future taxable profits. However, the relief comes with important limitations such as:
- The 75% utilization cap
- Restrictions on pre-tax regime losses
- Disallowance of losses linked to exempt income
- Mandatory utilization sequence
- Ownership continuity conditions under related provisions
For businesses, especially startups and companies in growth phases, understanding these provisions is essential for effective tax planning and compliance under the UAE Corporate Tax regime.
