Legislation and tax administration’s guidance
Section 122 of the Income Tax Act (Tuloverolaki or TVL) provides for the effect of a change of ownership on the deduction of losses in corporate income tax (Income Tax Act 122 §). The Act states that no losses shall be recognized in the case the company if (during or after the year of loss) more than half of company’s shares change hands or more than half of its members changed (by virtue of a gain other than inheritance or will). When there has been such a change in ownership, the tax loss application for an exemption for losses becomes relevant.
Treatment of tax losses in taxation
As a general rule, losses of the same source of income established in previous tax years are deducted from the income of a limited company for the tax year (financial year). Losses established in the taxation of a limited liability company are deducted in the next 10 tax years as income is generated.
This means that if a limited company has unused losses from previous financial years, they will be deducted from the company’s taxable income for the following tax year. Thus, income tax is payable for the tax year only on income not covered by the deductible loss for previous financial years.
For example, a limited liability company has a tax loss of € 20,000 for the financial year 2018. And the company will make a profit of € 30,000 in the financial year 2019. In this case, the company first deducts a loss of € 20000 from previous years profit (€ 30,000) and income taxes will be paid only on the difference (€ 10,000). As the corporate income tax rate for the year 2019 is 20%, the income tax payable would be € 2,000.
If more than half of the Company’s shares have been transferred (either directly or indirectly), the Company loses its right to deduct such losses from the profit for the period.
Applying for an exemption
Answer is No. However, the limited liability company must apply to the Tax authorities for an exemption for the tax losses. The Tax Administration may, on application, grant a right to deduct losses for special reasons, regardless of the transfer, if this is necessary for the continued operation of the entity or the group. The ultimate purpose of the Section 122 of the Income Tax Act is to prevent trading at a loss, not to complicate the business of the companies.
The granting of an exemption requires that the reduction of losses be necessary for the continued operation of the entity or group. This means that the entity or group must continue to operate after the transfer.
In its guidance, the Tax Administration regulates the conditions for the grant of an exemption (Tax admin’s guide). Such conditions include, for example, a change of generation, the sale of the company to employees, and the immediate employment effects of the continuation of the business.
An application for an exemption for a loss period must be made in writing to the Tax Administration. The decision of the taxpayer may be appealed in case the decision is not favorable.
We will gladly assist you with the tax loss application
In case you need help with the application, do not hesitate to contact us:
+358 (0)45 6743350
Jonne Anttila, MSc., is founder and CEO of eAccounting Finland Oy.