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New GFD information on claiming tax losses

At the end of 2021, the General Financial Directorate issued its information on the application of a special provision on claiming tax losses as an item deductible from the tax base under Section 38zh of the Income Tax Act.

The information relates to a special provision of the Income Tax Act governing situations where taxpayers file additional income tax returns claiming a tax loss as an item deductible from the tax base while the loss has not yet been finally/conclusively determined. The information reflects the basic parameters of that provision; its purpose is not to cover the impact of the provision on all conceivable situations, but to increase taxpayer awareness and legal certainty.

Section 38zh the Income Tax Act involves situations where an additional tax return through which the taxpayer plans to claim the tax loss as deductible from the tax base is filed at the same time as a regular or an additional tax return for the period in which the taxpayer reports such a tax loss. The provision introduces a fiction whereby the additional tax return is deemed to have been filed on the date on which the tax loss was finally/conclusively determined. The taxpayer therefore claims the tax loss prematurely and assumes that the tax loss will be finally determined in the amount claimed.

Since the taxpayer files the additional tax return before the tax loss is determined, the above provision expands the number of inadmissible tax assertions stipulated in the Tax Procedure Code. For example, an additional tax return filed from the date of filing the first additional tax return (at the same time as the regular tax return) until the day preceding the date on which the tax loss is legally determined will be considered inadmissible. Information from such a return may be used to assess additional tax. As this is an invalidly filed additional tax return, a penalty will be assessed in addition to default interest. The new provision has been incorporated into the Income Tax Act with effect from 1 July 2020 and can be applied to losses for taxable periods ending on or after 30 June 2020. However, taxpayers need not use the fiction provided for by Section 38zh and can claim the loss as a deductible item after it has been finally/conclusively determined.

We recommend paying increased attention to claiming tax losses retrospectively and filing corrective and additional income tax returns.