These are the new rules for loss compensation in corporate income tax
As of January 1, 2022, the time limit for offsetting losses in the corporate income tax changes. From that date onwards, losses can be carried forward indefinitely. The maximum loss that can be set off in one year will be limited.
Loss compensation period
Currently, corporate tax losses are offset in two ways:
- Compensation of losses with the taxable profit of the previous year (carry back of losses);
- Compensation of losses with the taxable profits of up to the following six years (loss carry-forward).
Carry back of losses is applied to the profit of the previous year. Is this not possible or is there still a remaining loss? Then carry forward of losses is applied to the profits of future years.
Adjustment of period for loss carry-forward
As of January 1, 2022, the period for forward loss relief will expire. As of that date, losses can be carried forward indefinitely. The period for carry back of losses will remain one year.
Limitation on the amount of losses that can be carried forward
In addition to the extension of the period for loss compensation, a 'temporization measure' will also take effect. This measure means that if the profit in one year exceeds € 1 million, only 50% of the profit above € 1 million can be set off against a loss from another year. The object of the government is that large(er) companies pay tax in profit years anyway, if the profit exceeds € 1 million.
These new loss relief rules will apply to losses incurred in fiscal years beginning on or after January 1, 2013.
Calculation example for application of new rules
Suppose your company reports a negative result of € 2,000,000 in 2021 and in 2022 a positive result of € 1,600,000. Because of the 'temporization measure’ the entire profit cannot be set-off against the loss. The profit up to € 1,000,000 can be fully offset, but the portion above only half. This means that in 2022, after loss compensation, a positive result of € 300,000 remains, on which corporate tax is payable. There remains a loss from 2021 of € 700,000. This loss can be set off in the future, if and in so far (sufficient) profit is reported.
Want to know more?
Want to know more about loss relief in corporate tax? Our tax advisors would be happy to help. Contact Robert Gall, senior tax advisor, by email.