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Tax Loss Relief and Transfer Regulations : An Overview

Tax Loss Provisions

Tax loss provisions serve as crucial components of the tax system because they allow businesses to balance their losses against taxable revenue in order to reduce their overall tax obligation. During difficult times, these laws give some financial assistance to enterprises. This article is to offer a thorough explanation of the tax loss alleviation and transfer requirements specified in Articles 37 and 38 of the applicable decree-law.

The provisions for tax loss relief are outlined in Article 37 of the decree-law, which states that a tax loss can be credited against the taxable income of following tax periods. However, certain requirements and limits must be satisfied in order to obtain this relief. Article 38 also provides an understanding of transferring tax losses from one taxable person to another, subject to certain conditions.

Tax Loss Relief (Article 37):

1. Tax Loss Offset: A tax loss incurred in one tax period can be used to lower taxable income in subsequent tax seasons.

2. Limitations on Tax Loss Relief:
a) Maximum Offset Percentage: The tax loss used to lower taxable income in any subsequent tax period cannot exceed 75% of the taxable income for tax period before any tax loss relief. Certain conditions, as stipulated by the Cabinet, may allow for varying percentages.

b) Exceptions to Tax Loss Relief: Tax loss relief cannot be claimed for the following
i) Losses accrued prior to the start of Corporate Tax.
ii) Losses suffered prior to becoming a taxable person under this decree-law.
iii) Losses sustained as a result of an exempt asset or activity, or those that are not accounted for under this decree-law.

3. Carrying Forward Tax Losses: Any leftover tax loss in a future tax period after balancing against taxable income can be carried forward to subsequent tax periods. This must be done, however, before using any tax loss transmitted under Article 38 of the decree-law.

Conditions for Transfer of Tax Loss (Article 38):

1. Transfer Eligibility:
a) Juridical Person Requirement: Both taxable people participating in the transfer must be juridical persons.
b) Residency Requirement: Both taxable individuals must be residents.
c) Ownership Interest: One taxable person must possess at least 75% of the other taxable person directly or indirectly, or a third party must own at least 75% of both taxable people.
d) Common Ownership Period: The common ownership indicated in point (c) must exist from the beginning of the tax period in which the tax loss is incurred until the end of the tax period in which the transferred tax loss is adjusted against the recipient taxable person’s taxable income.
e) Exempt Person Exclusion: None of the individuals concerned are exempt.
f) Exclusion of Qualifying Free Zone Persons: None of the individuals implicated are qualified free zone residents.
g) Financial Year Alignment: Each taxable person’s fiscal year must finish on the same day.
h) Uniform Accounting Standards: Both taxable persons must use the same accounting standards when preparing their financial accounts.

Tax loss relief and transfer laws are critical features that allow firms to manage their tax responsibilities more effectively. Article 37 of the decree-law allows tax losses to be credited against taxable income, subject to certain limits and exceptions. Article 38 provides for the transfer of tax losses between qualifying taxable individuals if the conditions are met.  Understanding these restrictions can help firms optimize their tax positions and ensure compliance with applicable tax laws.



This article was published on  22 May 2023

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