Small Business Relief Forfeits Your Loss: AED 250,000 Example (UAE)

A new consultancy loses AED 250,000 in 2025 and is eligible for small business relief. The founder elects the relief thinking it is harmless in a loss year.

It is not harmless: a relief period cannot generate a carried-forward tax loss, so the AED 250,000 vanishes. In 2026 the firm earns AED 600,000 with nothing to shelter it.

2026 tax is therefore AED 20,250, where the normal route would have given AED 0. The election cost AED 20,250.

2025: the relief deems taxable income nil, so no tax loss is recognised and nothing carries forward.

2026: with no loss available, taxable income stays AED 600,000 and tax is 9% of AED 225,000, which is AED 20,250. The normal route would have left AED 350,000 inside the 0% band.

For the complete rulebook behind these adjustments, see our guide to tax loss relief.

Each step below carries its own arithmetic, so the full trail from the starting figure to the tax payable is visible.

Article 37 lets a tax loss be carried forward indefinitely and offset against future taxable income, subject to a cap: no more than 75% of the period's taxable income before loss relief can be sheltered. The offset is mandatory to the fullest extent possible, the oldest losses are used first, and a company's own losses are used before any transferred group losses.

Losses are not immortal in every circumstance. They cannot arise before the corporate tax regime began or before the person became taxable, and losses from exempt activities do not qualify. A greater-than-50% ownership change restricts them unless the same shareholders keep 50% or the new owners carry on the same or a similar business.

The 75% cap is what stretches large losses over many years: with AED 3,000,000 of losses against AED 1,000,000 of profit, only AED 750,000 is absorbed and AED 2,250,000 carries on. The cap guarantees that profitable years always leave a taxable base of at least 25% in principle.

Loss relief is applied before the AED 375,000 threshold, which is then measured against the reduced taxable income. And electing small business relief in a loss year forfeits the loss entirely, because a deemed-nil period cannot produce a tax loss.

One more ordering rule matters: a company's own carried-forward losses are used before any losses transferred in from another group company. The pool has a strict seniority, oldest first within the company's own losses, then transferred losses, and the 75% cap applies to the total offset taken together.

Also note what cannot create a tax loss at all. Losses incurred before the corporate tax regime commenced, before the person became taxable, or from activities generating exempt income are simply outside the system. Only genuine taxable-business losses enter the carry-forward pool.

The background rules are set out in our guide to taxable income.

Offsetting less than the maximum to save losses for later is not allowed: the FTA guidance requires the fullest possible offset each year. Losses cannot be warehoused for a higher-tax future.

Applying the threshold before the loss relief is the second error. The order is fixed, losses first, and reversing it manufactures phantom tax.

Forgetting the ownership conditions after a takeover is the third. A share sale above 50% combined with a business change silently kills the loss pool, and the next profitable year's computation then has no shelter.

A fourth mistake is netting the loss against the threshold instead of against income. Losses reduce taxable income; the threshold is then applied to the reduced figure in full. The band itself is never consumed by losses.

Our guide to tax groups covers the underlying provisions in more depth.

The tax return requires a loss schedule: each year's loss vintage, the offset taken in the current year, and the balance carried forward, in oldest-first order. The 75% cap computation is shown against taxable income before relief, so the reviewer can see the cap was respected.

Attach or retain the ownership history supporting the continuity conditions, especially where shares changed hands. A greater-than-50% change with a business change forfeits the pool, and the return position should reflect that before filing, not after an enquiry.

Where group relief is also used, the return must show the company's own maximum offset first and only then the transferred amount. The ordering is part of the claim's validity, so the workpapers should make the sequence explicit.

Finally, keep the loss schedule alive across adviser changes: it is the one workpaper every future computation depends on. A new preparer who cannot see each vintage's history will struggle to apply the 75% cap and the oldest-first ordering correctly.

This page works one computation end to end: the scenario sets out the starting figures, the adjustments section applies each tax correction with its article reference, and the step-by-step section shows every line of arithmetic. The key figures are collected here for quick reference.

Use this page as a template by replacing the scenario's numbers with your own while keeping the same adjustment logic: the method, the article references and the order of operations transfer directly to any similar computation.

When you adapt the template, re-check each adjustment against the current facts rather than copying the amounts. A fine that was non-deductible here might be breach-of-contract compensation there; entertainment is always halved but only genuine client entertainment belongs in that line; and exempt income must meet its article's conditions in your period, not just resemble last year's.

Pay particular attention to the order of operations when you reuse the method. Adjustments come first to reach taxable income, then loss relief and the interest limitation apply to that figure, and only then do the 0% and 9% rate bands divide it. Reordering these layers is the fastest way to turn a right method into a wrong answer.

Finally, keep the evidence behind every figure you substitute. The FTA tests computations from the documents outward: invoices behind expenses, dividend vouchers behind exempt income, valuations behind market-value adjustments, and assessments behind foreign tax credits. A template with good numbers and no evidence is only half a return.

Continue with these worked examples: worked example: losses forfeited on business change, worked example: AED 10 million loss over two years, and worked example: no expiry over six years. For the underlying rules, see our guides to tax loss relief, taxable income and tax groups.