Tax deductions based on previous years’ allowable losses – limited liability companies and cooperative societies

If your corporate entity’s economic result for the tax year is negative, and the Tax Administration confirms that the loss is an allowable loss, its amount can be deducted from upcoming years’ profits. Allowable losses are deducted within the next 10 tax years as new profit accumulates. It is not necessary for your corporate entity to demand the above deduction. Instead, the Tax Administration deducts the allowed losses automatically.

A further requirement is that an allowable loss can only be deducted against the income from the same source of income where the loss had occurred. Nevertheless, starting 2020, most companies and corporate entities are no longer treated as having any personal source of income. If your company still has some allowable losses relating to its personal source of income, these previous losses can now be deducted against your company’s business source of income.

Example – tax year 2020: The company’s profits from its business source of income amount to €2,000 while the profits from its agricultural source of income amount to €1,000. For the previous tax year 2019, the company’s allowable loss is €2,500 from a personal source of income, and the company has not deducted it from its taxable profits yet. The loss relating to the personal source of income will now be deducted from the profits relating to the business source. After this, the company’s taxable income for tax year 2020, from its business source of income, is €0, and its business source’s income subject to tax is €1,000. The company must pay 20% or €200 of income tax.

Example – tax year 2021: The company’s profits from its business source of income amount to €1,500 while the profits from its agricultural source of income amount to €2,000. The company has an allowable loss for its personal source of income, amounting to €500. The company has not yet deducted that loss from its taxable profits. The company’s income from its business source of income amounts to €1,000, and its agricultural source’s income is €2,000. The tax year’s income tax is 20% of this, i.e. €600.

Effect of ownership changes on the deductibility of losses

Corporate entities lose their right to deduct previous years’ losses if all the circumstances listed below are relevant:

• More than 50% of corporate stock has changed hands, either directly or indirectly.
• These changes of ownership took place during a year when a loss was made or during the years that followed a year when a loss was made.
• The reason for the shares to change hands was not related to an inheritance or testament; i.e. the reason was related to a purchase, acquisition, trading of the stock.

In addition, if the corporate entity is a cooperative society, the right to deduct previous years’ losses is forfeited if a new member-shareholder comes forward, who buys a higher quantity of shares than the quantity that the previous members have owned so far, in order to enter into the cooperative society’s membership.   In this situation, the number of votes accorded to that new member is not important: the cooperative society loses its right to deduct previous years’ losses even if the new member were given just one vote.

However, corporate entities are entitled to submit an application for a special permit for deducting losses in spite of a change that has occurred in the ownership structure. Read more about allowable losses in taxation and about changes in corporate ownership.

Where another corporate entity or another consortium has been your corporate entity’s shareholder, the tax authorities may additionally take account of the way the shareholder’s shares have changed hands. Those changes would be deemed important in the following conditions:

• The other corporate entity, consortium or partnership has at least a 20% holding
• More than half of the shares of the other corporate entity, consortium, partnership was changed from one owner to another

If the above applies, the part of your entity that had been held by the other entity, consortium or partnership has been transferred – for purposes of taxation – to a new owner.

Illustration: X Ltd owns the entire corporate stock of Z Ltd. When more than half of X Ltd’s shares go to a new owner, all shares of Z Ltd are deemed as having changed hands.

However, in the case of listed companies, i.e. if your company’s shares are publicly traded on a stock exchange, any changes in its ownership do not prevent the deduction of losses or the deduction of unused tax credits.