Whether a company is profitable or not, filing taxes is always inevitable. However, have you ever considered that losses in previous years can be used to offset future tax payments? Today, Pacers will introduce you to the concept of tax loss and show you how to use it.

Is a company’s financial loss the same as a tax loss?

No! They are different. A company’s financial loss reflected in its financial statements is prepared according to accounting standards. In contrast, a tax loss is calculated according to tax regulations by adjusting the profit or loss reflected in the financial statements. When preparing a company’s financial statements, the directors or management team may make various assumptions that can affect the company’s profit. To reduce the impact of these assumptions, the IRD makes adjustments according to tax regulations. The adjusted profit is referred to as assessable profits on the profit tax return, while the adjusted loss is called an adjusted loss. Therefore, even if a company has a significant financial loss in its financial statements, it does not necessarily mean a tax loss.

Who is eligible to claim a tax loss? 

Anyone or any organization operating any industry, profession, or business in Hong Kong, regardless of whether it is a limited or unlimited company, is eligible to claim a tax loss if it has an adjusted loss. However, suppose a company does not have any assessable profit generated or sourced from Hong Kong in the year of assessment (e.g., no business activities). In that case, it does not have an adjusted loss and, therefore, cannot claim a tax loss.

How to use a tax loss? 

When a company incurs a tax loss in a year of assessment, it can use the tax loss to offset its assessable profits in subsequent assessment years. The tax loss can be accumulated and carried forward until it is fully utilized or until the company ceases operation. When using a tax loss to offset against assessable profits in subsequent assessment years, the company cannot choose to allocate the amount of tax loss or which year of assessment to apply it to. In other words, the company cannot only deduct a portion of the accumulated tax loss and enjoy tax reduction.

Can a tax loss be transferred to another company? 

No, even companies under the same enterprise group cannot transfer tax losses under the tax exemption regime. Therefore, a company’s tax loss can only be offset against its future profits until the loss is fully utilized. Although tax losses cannot be transferred, qualifying tax losses can be carried forward or set off against the assessable profits of the merged company in a merger situation. However, the companies involved in the merger must have operated in the same or similar industries, professions, or businesses before the merger and will continue to operate in related industries, professions, or businesses. The requirement ensures that the merger is based on commercial considerations rather than tax avoidance as the primary purpose.

How to declare a tax loss? 

When a company incurs an adjusted loss (before the loss brought forward) in a year of assessment, it can be reported in the first part of the profits tax return form under the “Statement of Assessable Profits (or Adjusted Losses)” section. Adjusted losses brought forward from prior years can be reported in the losses brought forward section. Failure to report the tax loss in the profits tax return form may result in the inability to offset past tax losses against future assessable profits.

Conclusion

Many of you may have received the profits tax return for the year of assessment 2021/22 in May. Due to the impact of the pandemic in previous years, many companies have incurred losses. However, as the situation improves, we believe that businesses will return to normal. Therefore, it is important to make good use of the company’s past losses to offset future assessable profits, thereby reducing the tax burden.

Pacers is a diversified company providing professional consultancy services. We always think a step further for our clients. If you have encountered any difficulties when purchasing a company, please feel free to contact us directly on our website or email info@pacersconsulting.com.

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