Table of Contents
- Why is Article 38 Important?
- Basic Concept of Tax Loss Transfer
- Conditions for Transfer of Tax Loss
- Ownership Must Continue Throughout the Relevant Period
- Practical Example
- Exempt Persons Cannot Participate
- 75% Utilisation Restriction Still Applies
- Practical Example
- Tax Computation
- Impact on the Transferor Company
- Example
- Difference Between Tax Group and Tax Loss Transfer
- Practical Business Importance
- 1. Better Cash Flow Management
- 2. Support for Expanding Groups
- 3. Flexibility Without Forming a Tax Group
- Key Compliance Points
- Conclusion
The UAE Corporate Tax Law not only allows businesses to carry forward their own tax losses under Article 37, but it also permits eligible group companies to transfer losses between each other under Article 38 – Transfer of Tax Loss. This provision is particularly beneficial for corporate groups where one company is making profits while another company within the same group is incurring losses.
In simple terms, Article 38 allows one eligible UAE company to use the tax losses of another eligible UAE group company to reduce its taxable income, subject to certain conditions.
Why is Article 38 Important?
In many business groups:
- One company may be profitable.
- Another company may still be in a startup or expansion phase and generating losses.
Instead of waiting for the loss-making company to become profitable in the future, the UAE Corporate Tax Law allows those losses to be transferred within the group to reduce the current tax burden of another group company.
Basic Concept of Tax Loss Transfer
Example
| Company | Taxable Result |
| Company A | Profit AED 1,000,000 |
| Company B | Loss AED (600,000) |
If both companies satisfy the conditions under Article 38, Company B may transfer its tax loss to Company A.
As a result: Net taxable income is AED 400,000. This reduces the group’s overall Corporate Tax liability.
Conditions for Transfer of Tax Loss
Article 38 contains several important conditions that must all be satisfied.
- Both Entities Must Be Juridical Persons
- Bothcompanies must qualify as UAE Resident Persons for Corporate Tax purposes.
- Minimum 75% Ownership Requirement
One of the most important conditions is the 75% ownership test.
The law allows tax loss transfer if:
- One company owns at least 75% of another company, OR
- A third common shareholder owns at least 75% in both companies.
Ownership Must Continue Throughout the Relevant Period
The ownership relationship must exist continuously:
- From the start of the Tax Period in which the loss was incurred, AND
- Until the end of the Tax Period in which the loss is utilized.
Practical Example
Suppose:
- Company B incurred losses in January 2025.
- Company A purchased 80% shares only in December 2025.
In this case, the condition may fail because the required ownership did not exist from the beginning of the Tax Period.
Exempt Persons Cannot Participate
Tax loss transfer is not available if either entity is an Exempt Person.
Examples of Exempt Persons may include:
- Government entities
- Certain public benefit entities
- Certain pension or investment funds
Qualifying Free Zone Persons can not participate in tax loss transfer under Article 38.
Same Financial Year Requirement
Same Accounting Standards Must Be Used
75% Utilisation Restriction Still Applies
Even after transfer, the receiving company cannot utilize losses beyond the limit prescribed under Article 37. (Crowe)
Practical Example
| Particulars | AED |
| Company A Taxable Income | 1,000,000 |
| Company B Transferable Loss | (900,000) |
Maximum loss that can be utilized:
75% of 1,000,000 = 750,000
Tax Computation
| Particulars | AED |
| Taxable Income | 1,000,000 |
| Allowed Tax Loss Offset | (750,000) |
| Remaining Taxable Income | 250,000 |
The remaining AED 150,000 loss may continue to be carried forward.
Impact on the Transferor Company
When a company transfers its tax loss:
- Its own available carried forward tax losses reduce by the transferred amount.
Example
| Particulars | AED |
| Original Tax Loss | 500,000 |
| Loss Transferred | (300,000) |
| Remaining Loss Available | 200,000 |
The same loss cannot be used twice.
Difference Between Tax Group and Tax Loss Transfer
Many people confuse Article 38 with Tax Group provisions under Article 40.
| Particular | Tax Loss Transfer – Article 38 | Tax Group – Article 40 |
| Minimum Ownership | 75% | 95% |
| Separate Tax Returns | Yes | No – Single group return |
| Loss Sharing | Allowed | Automatically consolidated |
| Applicable to Sister Companies | Yes | Yes |
Article 38 is useful where companies do not meet the stricter 95% requirement for forming a Tax Group.
Practical Business Importance
1. Better Cash Flow Management
Profitable companies can reduce immediate tax costs by utilizing losses from other group entities.
2. Support for Expanding Groups
Startup or expansion entities often generate losses initially, while mature group companies remain profitable.
3. Flexibility Without Forming a Tax Group
Businesses can still benefit from loss sharing even if they do not form a formal Tax Group.
Key Compliance Points
Businesses should maintain:
- Shareholding records
- Group structure charts
- Financial statements
- Tax computations
- Evidence of continuous ownership
- Accounting standard consistency documentation
The Federal Tax Authority (FTA) may request supporting evidence during review or audit.
Conclusion
Article 38 of the UAE Corporate Tax Law provides significant flexibility for corporate groups by allowing eligible companies to transfer tax losses between each other. However, the relief is available only when strict conditions are satisfied, including:
- UAE residency
- Juridical person status
- Minimum 75% ownership
- Continuous ownership
- Same financial year
- Same accounting standards
- Exclusion of Exempt Persons and Qualifying Free Zone Persons
The provision helps ensure that Corporate Tax is applied more efficiently at the economic group level while preventing misuse of tax losses.
