Company Loss Carry-Forward Rules
Loss carry-forward - continuity of business activities
Interpretation statement IS 22/06 issued by the IRD clarifies the content and application of the main ideas behind the business continuity test.
The business continuity test legality is defined in section IB 3 of the Income Tax Act 2007. The section highlights that a business loss may be carried forward in spite of an ownership continuity breach if there has been no major business change. This means that even if more than 49% of voting shares change hands throughout the year, tax losses can still be carried forward.
How can I carry forward a loss despite the breach in shareholding?
In order to correctly carry forward losses, it is essential to understand two key terms; tax loss and tax loss component.
A tax loss can be defined as the total loss amount for the tax year that the company can carry to the following year. This tax loss is made up of tax loss components. Tax loss components consist of items such as losses from the current and previous years as well as other amounts allowed by IRD. It is important that these components are used in the order in which they arise.
In order to determine whether a change is significant enough to constitute as a major business change, the appropriate factors must be considered. Examples of these factors include considering all relevant intangible and tangible assets, scale of operations, the type of product/service provided, and the market provided to. If it is found that there has been a major change to one or more of the above factors, then a tax loss cannot be carried forward unless it falls under the permitted major changes.
What are the permitted changes for tax loss carry forward?
The 4 permitted changes conclude that if a change is made to increase efficiency of the business, keep business activity up to date with new technology, increase the scale of operations or change the type of goods/services provided, then a tax loss can be carried forward despite an ownership continuity breach.
Whether a business change falls into one of the above categories should be checked carefully as it will help determine whether a tax loss can be carried into the following year.
It is crucial to make an informed decision when deciding to carry forward a loss. It is irreversible, for further assistance on the matter it is recommended to speak to a qualified tax accountant, contact us through the form below.
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