The group can adjust the tax losses up to the 75% of taxable income of the group; and the remaining losses of the group can be carried forward for unlimited period, provided there is a continuity of the ownership or continuity of business of the group if there is no continuity of ownership. The taxable person cannot seek tax loss relief for losses occurring prior to the initiation of corporate tax.
Ownership continuity requires that there is no more than a 50% change in ownership from the time losses were incurred until they were adjusted, and this requirement applies at the parent level. Business continuity entails that group entities continue to utilise the same assets as they did before any change in ownership; taxable group entities have not made significant alterations to the fundamental identity or operations of their business since the change in ownership; and if any changes have occurred that are a result of the development or utilization of assets, services, processes, products, or methods that existed prior to the change in ownership.
Within a tax group, if one member experiences a tax loss while another member generates positive taxable income, their results are automatically consolidated. Furthermore, if a subsidiary leaves the tax group, any associated tax loss will remain with the tax group except pre-grouping unutilised tax losses that will be carried by the subsidiary. In the event of the tax group’s dissolution, such tax losses will be retained by the parent company; and if the parent company ceases to be taxable person, losses will not be available for utilisation. Where there is a change of the parent company of the group; the tax losses will remain with the group.
Where a subsidiary joins an existing tax group and brought losses with itself, this is called “Pre-grouping tax losses”. Pre-grouping tax Losses take precedence over other carried forward tax losses within the same tax period. To utilise pre-grouping tax losses, the tax group must have taxable income (excluding a carried forward tax loss) and the subsidiary has sufficient taxable income. Additionally, the use of carried forward tax losses is restricted to 75% of the taxable income, a limitation that applies solely at the tax group level. Pre-grouping losses can be adjusted up to 75% of the taxable income of the group or the actual taxable income of the subsidiary, whichever is lower.
The losses are to be utilised by the group in a specific order: first, any pre-grouping tax loss should be adjusted, and where there are multiple pre-grouping tax losses, the sequence of adjustment of losses will be decided by the parent company. Next, the tax losses of the tax group should be used in the order in which they were incurred, giving priority to restricted tax group tax losses before utilizing later tax group tax losses. Finally, losses transferred under article 38 of the law should be considered for utilization.
When a subsidiary becomes part of an existing tax group and the group has incurred losses prior to the subsidiary’s inclusion, these losses are referred to as “restricted tax group tax losses.” Such losses cannot be used to offset taxable income attributable to subsidiaries that joined the tax group after the losses occurred. However, these can be offset against 75% of the taxable income of tax group members that existed before the subsidiary joined, and the remaining portion of 75% of the group’s taxable income after adjusting for pre-grouping tax losses, whichever is lower provided the group, existed before joining of subsidiary, has sufficient taxable income in the current tax period.
If a business is transferred to a taxable person under Article 27 (Business Restructuring Relief) and the transferor had unused tax losses, these losses can become the tax losses of the transferee if related conditions are satisfied. In this scenario, the tax losses are treated in the same manner as any other tax losses of the transferee.
Upon fulfilment of the specified conditions, the tax group is empowered to transfer a tax loss to another taxable person or tax group, and conversely, another entity can transfer a tax loss to a different group. If a tax loss is transferred to the tax group, it can only be utilised after the utilisation of any pre-grouping tax losses, restricted tax group tax losses, and other tax losses of the tax group.
The groups must carefully evaluate the handling of tax group losses and exercise great care in determining their taxable income.
(Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above article is not an official view of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at [email protected])