Tax loss carry back
The Ministry of Finance has proposed an amendment to the Income Tax Act introducing the option to utilise tax losses retrospectively for up to two years, or prospectively for up to six years. This would not be just a temporary solution, as the concept should become permanent.
Tax loss carry back
Under the proposed amendment, tax payers will have the option to claim a tax loss or its part against their personal and corporate income tax bases in taxable periods, or periods for which a tax return is being filed, that commenced within two years before the beginning of the period for which the tax loss has been assessed, or within six years after the end of this period.
Taxpayers using a calendar year as a taxable period may claim their tax loss for 2020 in the taxable periods that commenced on or after 1 January 2018.
A tax loss may first be claimed retrospectively by taxpayers using the fiscal year from 1 July 2019 to 30 June 2020 as a taxable period, for periods that commenced after 1 July 2017.
To carry back the loss, an additional tax return will have to be filed for the relevant years, together with an application for a refund of an overpayment.
Tax loss carry forward
A tax loss may also be claimed in taxable periods, or periods for which a tax return is being filed, that commenced within six years after the end of the period for which the tax loss has been ascertained. The six-year deadline shall end on the elapse of the last day of the sixth year; this is different from the counting of time under Section 33 of the Tax Procedure Code, which stipulates that deadlines shall begin on the day that follows the day when the fact determining the beginning of the deadline took place.
If the calendar year 2020 is used as a taxable period, the six-year deadline to claim the loss assessed for the current year shall elapse on 31 December 2026, meaning that the tax loss may be last claimed in the taxable period of the year 2026.
At the same time, the rule stipulated by the General Financial Directorate’s Instruction D-22 shall no longer apply under which shorter periods, i.e. periods for which a tax return is being filed, were not to be included in the five taxable periods in which a tax loss could be claimed. The six-year deadline will thus remain the same, whether the taxpayer claims the loss in a standard or shorter taxable period.
Tax loss upon business transformations
The proposed wording does not allow to carry back losses taken over upon business transformations and transfers of a business establishment. According to the explanatory report, however, it is assumed that a regulation allowing for tax loss carry back upon transformations will be adopted in the future.
Tax loss cannot also be claimed (or carried back) if there was a substantial change in the persons directly participating in the taxpayer’s capital or control; this shall not apply if the taxpayer proves that at least 80% of revenues after such substantial change have been generated from the same activity.
Tax loss of investment incentives’ recipients
For investment incentives’ recipients, there will be a special (in our opinion rather ambiguous) regulation of loss carry back. Taxpayers claiming tax relief on the grounds of granted incentives will have to meet special conditions: they will have the duty to claim items reducing the tax base in the form of tax loss in the nearest period for which a taxable profit is reported, unless these had been claimed in the preceding taxable periods.
The explanatory report implies that if an investment incentives’ recipient has reported a tax loss, they may carry it back but are not obliged under the law to do so. As for the loss carry forward, the duty to claim the loss in the maximum possible amount remains.
Investment incentives’ recipients should therefore decide whether to carry back their losses or not. When making this decision, it is also advisable to consider the possible effect on the S2 comparative tax base, to make sure that the recipient draws the investment incentive in the maximum amount possible; under certain circumstances, the S2 comparative tax base may also be reduced additionally.
Deadline for tax assessment
According to the Tax Procedure Code, the basic deadline for assessing tax is three years. The deadline for assessing tax as regards periods in which tax loss was assessed is calculated in a specific manner: it ends with the deadline for assessing tax for the last period in which the tax loss or its part could be claimed.
The extended deadline will also apply to periods in which a tax loss was claimed retrospectively. However, unlike for tax loss carry forward, the extension of the deadline shall not apply to prior periods if the taxpayer decides not to carry back the loss.
The final wording of the amendment to the Income Tax Act may yet change as the bill goes through the legislative process.