Utilising Company Tax Losses

 
Grange Associates Ltd - 5 September 2012

Company tax losses can be utilised in one of two ways.  Losses may either be carried forward indefinitely to be utilised in future tax years or made available to another company by way of grouping losses.

Carrying Losses Forward

For a company to carry its losses forward, there is a shareholder continuity requirement of 49%.  The losses may only be carried forward if there is a group of shareholders who collectively hold minimum interests in the company of at least 49%.

Grouping Losses

Where a group of companies meet the following requirements, they are able to utilise losses between the companies within the group.

Grouping

To qualify as a “group”, there must be shareholders holding common interests of 66% in the companies.

Commonality

Grouped companies must continually be members of the same group from the start of the period the tax losses were generated until the end of the period in which the  tax losses are utilised in the group. 

Continuity

The loss company must satisfy the 49% continuity rules for the carry forward of the tax loss from the time it was generated until it is utilised. 

Once the above requirements have been met, the losses can then be utilised either by a loss offset or a subvention payment within the group.

Loss Offset

A loss offset is limited to the recipient company’s profit and is recorded in both companies’ tax returns.  The profit company deducts the loss in its tax return and the loss company indicates in its tax return the amount of the loss it has made available to the profit company.

Subvention Payment

Instead of a loss offset, a subvention payment can be made.  This requires the profit company to make a payment to the loss company as a form of compensation for the tax losses it is able to utilise.  The subvention payment cannot exceed the cumulative tax loss of the loss company.  Recently it has been clarified that any subvention payments do not have to be physically paid, rather that the ordinary definition of payment would apply, which only requires a discharge of obligation between parties.

Any grouping of losses, either by loss offset or subvention must be notified to the IRD by the loss company in their tax return no later than 31 March after the tax year of the grouping.  The IRD however, does have discretion to grant an extension of time.

Part Year Losses

If there has been a breach of the continuity or commonality rules discussed above, part year accounts can be prepared to establish the losses available up until the date of the breach, which can then be utilised by the group for that part year.  However, any losses in excess of the part year’s net income will be forfeited.

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