Company Loss Transfer Rules
Company losses - ownership continuity, sharing and measurement
Interpretation statement IS 22/07 issued by the IRD delves into the rules surrounding company losses. It highlights that a tax loss can be carried forward to the following year where it is either subtracted from the company’s net income or added to the tax loss of the following year.
Ownership Continuity and Business Continuity
In order to be able to carry forward a tax loss, the conditions of either ownership or business continuity must be met. Ownership continuity occurs when at least 49% of voting shares do not change hands throughout the year. Business continuity occurs when ownership has changed but the business activities do not undergo any major change in the business continuity period. This period is generally from the start of the income year in which the loss arises to the end of the period when the loss is used.
Sharing the Loss Within a Group
For companies that are a part of a group, it is possible to share the tax loss with a profit company within the group, if the two requirements are met. Firstly, the loss company must satisfy either one of the continuity requirements mentioned above and must satisfy the ownership commonality. This means that the total interest of those that hold ownership interests in both the loss company and other companies in the group should be at least 68%. Along with this, the loss company must be carrying on business in NZ or be incorporated in NZ . This excludes dual resident companies from sharing losses. If these conditions are both met, the profit company must then use the tax loss to reduce its net income. They cannot carry the loss forward or share it with another company. It is important to note the tax loss being shared cannot exceed the net income of the profit company. Loss companies should keep track of ownership changes in order to ensure they fulfil the requirements.
It is crucial to make an informed decision when deciding to share loss as 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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