How UAE Tax Losses Work in Corporate Groups

Tax losses are deferred assets, and the UAE gives companies indefinite time to use them

The UAE Corporate Tax Law treats tax losses as a carry-forward asset with no expiry date. A company that incurs a loss in its first tax period can offset that loss against profits in any subsequent period, whether two years later or ten. The law imposes no time limit on carry-forward, which is more generous than many comparable jurisdictions that restrict carry-forward to five or seven years.

But indefinite carry-forward comes with conditions. The 75% utilisation cap ensures that profitable companies cannot eliminate their entire tax liability using accumulated losses. The ownership continuity and business continuity tests prevent loss trafficking through acquisitions. And the interaction between losses, group relief, and QFZP status creates structuring decisions that affect multi-entity groups across the UAE. Corporate lawyers in the UAE advise businesses and their accounting advisors on loss planning, group structuring, and the conditions that protect or forfeit carried-forward losses.

• Tax losses can be carried forward indefinitely under Article 37 of the Corporate Tax Law (Federal Decree-Law No. 47 of 2022). There is no time limit. A loss incurred in 2024 can offset income in 2034, provided the company remains a taxable person and meets the continuity conditions.
• The offset is capped at 75% of taxable income in any period. A company with AED 1 million in taxable income and AED 2 million in carried-forward losses can use AED 750,000 of those losses. It pays 9% corporate tax on the remaining AED 250,000. The unused AED 1.25 million carries forward to the next period. This means every profitable company pays some tax, regardless of its loss position.
• Carry-forward requires ownership continuity or business continuity. Under Article 39, the same shareholders must hold at least 50% of the company from the period the loss was incurred through the period the loss is utilised. If ownership changes by more than 50%, the loss survives only if the company continues the same or a similar business. Listed companies are exempt from this test.
• Losses can be transferred between group companies under Article 38, provided both companies are UAE-resident juridical persons, one holds at least 75% (directly or indirectly) of the other, both use the same financial year and accounting standards, and neither is an exempt person or a Qualifying Free Zone Person. The transferred loss is subject to the same 75% utilisation cap in the receiving company.
• Tax groups at 95% ownership pool profits and losses automatically under Article 40. The parent company files a single consolidated return for the group. Losses in one subsidiary offset profits in another without the need for a separate transfer election. But QFZPs and exempt persons cannot join a tax group, which limits the utility of grouping for free zone-heavy structures.
• Qualifying group relief (Article 26) and business restructuring relief (Article 27) allow tax-neutral transfers of assets and liabilities within groups, including the carry-forward of unutilised losses by the transferee in a business restructuring. These reliefs operate alongside the loss transfer provisions but serve different purposes and have different conditions. Neither relief is available if any party is a QFZP or an exempt person.

Who this applies to

UAE companies with accumulated losses from early trading periods. Many companies that started operations in 2023 or 2024 incurred losses during their setup phase. Those losses are valuable deferred tax assets if the carry-forward conditions are maintained.

Multi-entity groups considering how to structure loss utilisation across subsidiaries. The choice between loss transfer (75% ownership), tax grouping (95% ownership), and separate filing determines how quickly the group can use its accumulated losses and at what compliance cost.

Accounting and audit firms advising clients on corporate tax planning. Loss carry-forward is a mandatory adjustment (the company must offset losses before calculating tax; it cannot choose to forgo the offset). The sequencing of loss utilisation, the impact of ownership changes, and the exclusion of QFZP entities from group relief create advisory complexity that requires careful modelling.

Loss carry-forward: Article 37 mechanics

The 75% cap in practice

Article 37 requires that a tax loss carried forward to a subsequent period must be set off against the taxable income of that period before any remaining loss can be carried further forward or any loss can be transferred under Article 38. The offset cannot exceed 75% of taxable income.

This produces a minimum effective tax rate for any company with carried-forward losses. A company with substantial losses will pay 9% on 25% of its taxable income until the losses are fully absorbed. For a company earning AED 4 million per year with AED 10 million in losses, full absorption takes approximately four years (using AED 3 million per year, paying tax on AED 1 million per year).

The 75% cap applies after all other adjustments to taxable income (deductions, exemptions, transfer pricing adjustments) but before the AED 375,000 zero-rate band. Companies cannot choose to forgo the loss offset to preserve losses for a more profitable future year. The offset is mandatory.

Losses that cannot be carried forward

Several categories of loss are excluded from carry-forward. Pre-commencement losses (losses incurred before the company's first corporate tax period) are not recognised. For most companies, the first tax period began on or after 1 June 2023. Losses from the period before that date have no value under the Corporate Tax Law.

Losses incurred before a person becomes a taxable person are excluded. A natural person whose business turnover was below AED 1 million (and who was therefore not a taxable person) in a loss-making year cannot carry that loss forward to a year when turnover exceeds AED 1 million.

Losses from exempt income or assets are excluded. Income that is exempt from corporate tax (such as qualifying dividends under the participation exemption, or income from extractive businesses) does not generate a deductible loss. A loss on the disposal of a participation that qualifies for the participation exemption is not an allowable tax loss.

Losses attributable to a free zone person's qualifying income are excluded from offset against non-qualifying income, and vice versa. A QFZP cannot use losses from its 0%-rated qualifying activities to reduce tax on its 9%-rated non-qualifying income. This ring-fencing prevents cross-subsidisation between the two income streams.

Small Business Relief interaction

Companies that elect Small Business Relief (SBR) under Ministerial Decision No. 73 of 2023 are treated as having no taxable income for the relevant period. This means no loss is generated in an SBR period, even if the company's actual financial performance was negative. A company that elects SBR in a loss-making year forfeits the ability to carry that loss forward. The election must be weighed against the value of the loss.

For startup companies expecting losses in their first two to three years followed by profits, the SBR election destroys the loss carry-forward. The AED 375,000 zero-rate band provides some relief in early profitable years, but the accumulated losses that could have offset 75% of future income are gone. Tax advisors should model both scenarios before the SBR election is made.

Ownership and business continuity: Article 39

The 50% ownership test

Article 39 restricts loss carry-forward where the company's ownership has changed. The same person or persons must have continuously held at least 50% of the ownership interest in the company from the beginning of the tax period in which the loss was incurred to the end of the tax period in which the loss is offset.

This is a look-through test. The 50% threshold is measured by reference to beneficial ownership, not legal title alone. A company that changes hands through a share sale, a restructuring, or a dilutive capital raise that takes the original shareholders below 50% loses its carried-forward losses unless the business continuity test is satisfied.

The business continuity alternative

If the 50% ownership test fails (because more than half the shares changed hands), the loss can still be carried forward if the company continues to carry on the same or a similar business. The test is whether the company's principal business activity remains substantially the same before and after the ownership change.

A consulting company that is acquired and continues to provide consulting services to the same or a similar client base satisfies the test. A consulting company that is acquired and its business is converted to furniture trading does not. The FTA assesses the nature of the business activity, not the identity of the customers or the revenue level.

Listed company exemption

The ownership and business continuity conditions do not apply to companies whose shares are listed on a recognised stock exchange. Listed companies can carry forward losses regardless of changes in their shareholder register. This reflects the practical reality that listed company ownership changes constantly through market trading, and applying the 50% test would be unworkable.

Loss transfer between group companies: Article 38

When losses can move sideways

Article 38 allows a taxable person to transfer its tax losses to another taxable person within the same group. This is a voluntary election, not an automatic consequence of group membership. Both companies must agree, and the transfer must be documented.

The conditions are cumulative. Both the transferor (the company giving up the loss) and the transferee (the company receiving it) must be juridical persons. Both must be UAE tax residents. One must hold, directly or indirectly, at least 75% of the other, or a third person must hold at least 75% of each. Neither can be an exempt person or a QFZP. Both must use the same financial year and the same accounting standards.

The transferred loss is subject to the 75% utilisation cap in the hands of the transferee. If the transferee has AED 500,000 of taxable income, it can offset up to AED 375,000 (75%) using the transferred loss.

Priority of own losses

Article 37(4) establishes a priority rule. A company must first set off its own carried-forward losses against its taxable income before it can receive transferred losses from a group company. This prevents a company from preserving its own losses while using transferred losses to reduce its current tax bill.

The sequencing matters. If Company A has AED 100,000 of its own losses and AED 200,000 of taxable income, it must first offset AED 150,000 (75% of AED 200,000) from its own losses, leaving AED 50,000 of taxable income. It cannot then receive a transferred loss from Company B to offset that remaining AED 50,000, because the 75% cap has already been reached. Company A pays tax on AED 50,000.

Practical application for groups

Loss transfer is most useful for groups where one entity is profitable and another is in a loss position, but the group does not want to form a full tax group (which requires 95% ownership and a single consolidated return). A parent company with 80% ownership of a subsidiary can transfer the subsidiary's losses to the parent, reducing the parent's tax bill while both entities continue to file separately.

The limitation is that QFZPs cannot participate. A group with a profitable mainland holding company and a loss-making free zone subsidiary that is a QFZP cannot transfer the subsidiary's losses to the parent. The QFZP's losses are ring-fenced within the free zone entity and can only be offset against that entity's own future non-qualifying income (at 9%), not against the group's mainland profits.

Tax groups: Article 40

Formation and effect

A tax group is formed when a parent company owns, directly or indirectly, at least 95% of the share capital and is entitled to at least 95% of the profits and net assets of each subsidiary in the group. All members must be UAE-resident juridical persons. None can be an exempt person or a QFZP. All must use the same financial year.

Once the tax group is formed, the parent files a single consolidated corporate tax return. The taxable income of the group is calculated by aggregating the income and losses of all members, eliminating intercompany transactions, and applying the corporate tax rate to the net result. Losses in one member automatically offset profits in another within the same return, without the need for a separate Article 38 transfer.

The parent company is primarily responsible for the group's tax obligations. Subsidiaries have joint and several liability for the group's corporate tax, but this liability can be limited to specific members with FTA consent.

When grouping is better than loss transfer

Tax grouping eliminates the need for individual loss transfer elections, simplifies compliance (one return instead of many), and allows real-time offset of profits and losses across the group in a single period. For groups where all entities are mainland companies with 95%+ common ownership, grouping is the most efficient structure.

The trade-off is that grouping requires consolidated financial statements, which increases accounting complexity. Intercompany transactions must be eliminated, and transfer pricing within the group must still comply with the arm's length principle (even though the transactions net out in the consolidated return). If a subsidiary leaves the group (because ownership drops below 95%, or the subsidiary becomes a QFZP), the cessation triggers specific rules on how to allocate the group's losses and assets.

The QFZP exclusion

The most significant practical limitation of both loss transfer and tax grouping is the QFZP exclusion. A Qualifying Free Zone Person cannot transfer losses to a non-QFZP group member, cannot receive losses from a non-QFZP group member, and cannot join a tax group.

This creates a structural divide in groups that have both mainland and free zone entities. The mainland entities can form a tax group (at 95% ownership) or transfer losses (at 75% ownership). The QFZP entities operate in isolation, with their losses ring-fenced and their qualifying income taxed at 0%. A QFZP's non-qualifying income is taxed at 9% but cannot be sheltered by group losses from mainland entities.

For groups considering whether to claim QFZP status for a free zone subsidiary, the loss isolation must be modelled. A free zone entity with substantial losses from its setup phase may benefit more from remaining a non-QFZP (and joining the mainland tax group) than from claiming the 0% rate on qualifying income while losing the ability to share losses with the group.

Qualifying group relief and business restructuring relief

Article 26: tax-neutral asset transfers

Qualifying group relief allows assets and liabilities to be transferred between two group members without triggering a taxable gain or loss. The transfer is recorded at net book value. The transferee steps into the transferor's tax position, including the carrying value and the ownership period of the asset.

The conditions mirror the loss transfer conditions: 75% common ownership, both entities are UAE-resident juridical persons, same financial year, same accounting standards, and neither is a QFZP or exempt person. The relief is available for individual assets, groups of assets, and liabilities. It does not require the transfer of an entire business.

The FTA's Corporate Tax Guide on Qualifying Group Relief (CTGQGR1) provides detailed guidance on net book value calculation, the effect of multiple transfers, and the treatment of consideration (which can be cash, in-kind, or nil).

The two-year clawback is the critical risk. If the transferred asset, or the shares in the transferor or transferee, leave the qualifying group within two years of the transfer, the relief is reversed. The original transfer is treated as having occurred at market value, and the resulting gain or loss is recognised in the period of the clawback event, not the period of the original transfer. This means the gain can arise in the transferee's tax return in a year it did not expect.

Article 27: business restructuring relief

Business restructuring relief applies when a taxable person transfers its entire business (or an independent part of it) to another taxable person in exchange for shares or an ownership interest. The transferor ceases to exist, or continues with a reduced scope. The transfer is recorded at net book value, and the transferee inherits the transferor's unutilised tax losses, subject to conditions prescribed by the Minister.

The conditions include that the transfer must be for valid commercial reasons (not primarily for tax avoidance), the consideration must be shares or ownership interests, those shares must be held for at least two years, and both entities must comply with the general conditions (UAE resident, not exempt, not QFZP).

Business restructuring relief is used for mergers, consolidations, and de-mergers within groups. A group that wants to combine two mainland subsidiaries into one entity can transfer the business of one to the other without triggering tax, and the surviving entity inherits the losses of both. For guidance on when restructuring is appropriate, see our analysis of when to restructure a UAE company.

Practical scenarios

Scenario 1: Startup with accumulated losses joining a group

A technology company incorporated in 2023 incurred losses of AED 800,000 in its first two tax periods. In 2025, a mainland holding company acquires 100% of the shares. The acquisition changes ownership by more than 50%. The losses survive only if the technology company continues the same or a similar business after the acquisition. If the holding company converts the technology company into a real estate investment vehicle, the losses are forfeited.

If the business continues unchanged, the holding company can form a tax group (at 95%+ ownership) and the technology company's future losses are pooled with the group. The pre-acquisition losses carry forward within the technology company and are offset against its own future income at 75% per year.

Scenario 2: Loss transfer vs tax grouping

A UAE group has three mainland subsidiaries: Alpha (profitable, AED 2 million taxable income), Beta (loss-making, AED 500,000 loss), and Gamma (break-even). The parent holds 80% of Alpha, 100% of Beta, and 100% of Gamma.

Alpha cannot join a tax group with the parent (ownership is 80%, below 95%). Alpha can receive a loss transfer from Beta (75% common ownership is met). Beta transfers AED 500,000 of losses to Alpha, which offsets up to AED 1.5 million (75% of AED 2 million) from its own sources. Beta's AED 500,000 fits within this cap. Alpha's taxable income falls to AED 1.5 million.

Beta and Gamma can join a tax group with the parent (100% ownership). If the parent forms a tax group with Beta and Gamma, Beta's losses are pooled with the group's income automatically.

Scenario 3: QFZP isolation

A DMCC trading company has accumulated losses of AED 1.2 million from its first two years. It expects to become profitable in 2026. The company has claimed QFZP status, and 90% of its income is qualifying (0%). The remaining 10% is non-qualifying (9%).

The AED 1.2 million in losses can only offset the non-qualifying income. If non-qualifying income is AED 200,000 per year, the loss offset is AED 150,000 per year (75%). Full absorption takes eight years. The losses cannot be transferred to a mainland affiliate. The company cannot join a tax group. If the company had not claimed QFZP status, it could have joined the mainland group and used the losses against the group's 9% income immediately.

Scenario 4: The SBR trap

A small mainland company incurred an AED 300,000 loss in 2024. In 2025, it earns AED 250,000 and elects Small Business Relief (revenue below AED 3 million). The SBR election treats the company as having no taxable income, so no loss offset occurs. But the election also means no new loss is generated. The AED 300,000 loss carries forward to 2026.

If the company had elected SBR in both 2024 and 2025, the 2024 loss would not have been generated at all (because the SBR election treats the company as having no taxable income, which means no tax loss arises in the SBR period). The company should model whether electing SBR in a loss year destroys a valuable carry-forward.

How should UAE companies manage tax loss planning in 2026?

The loss provisions in the Corporate Tax Law reward companies that plan ahead and penalise those that do not. The 75% utilisation cap, the ownership continuity test, the QFZP exclusion, and the SBR interaction are all variables that affect the after-tax cost of losses. A company that understands these rules can turn a loss year into a tax-efficient recovery. A company that ignores them can forfeit losses that took years to accumulate.

Three priorities for 2026. First, model the impact of any planned ownership changes (share sales, capital raises, group reorganisations) on carried-forward losses before the transaction closes. The 50% ownership test and the business continuity alternative should be tested against the specific facts. Second, evaluate whether QFZP status is worth the loss isolation for free zone entities that are part of a larger group. The 0% rate on qualifying income is valuable, but so is the ability to share losses with profitable group members. Third, review the SBR election against the loss position. For companies with revenue below AED 3 million and carried-forward losses, the SBR election may cost more than it saves.

For multi-entity groups, the choice between loss transfer (75% ownership, separate returns) and tax grouping (95% ownership, consolidated return) should be made with a multi-year profit and loss forecast. The group's corporate tax compliance framework should include a loss utilisation schedule that tracks each entity's position, the carry-forward balance, the ownership status, and the anticipated offset timeline.

Legal advice on loss planning should be obtained before the ownership change, the restructuring, or the SBR election, not after the carry-forward has been forfeited.

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