Tax loss carryforward – Part 1
30 Apr 2019
The Korean tax law allows tax losses incurred within certain periods to be set off against the taxable income of a company in subsequent fiscal years. This month’s newsletter will briefly cover key details of the tax loss carryforward regime in Korea, particularly with respect to the tax loss carryforwards claimed against a company’s taxable income.
2. Major contents
Tax loss carryforwards set off against the taxable income of a company
(1) Definition of tax loss carryforwards
Tax loss carryforwards refer to the tax losses carried forward from prior fiscal years. The tax loss occurs when tax-deductible expenses exceed taxable revenues of a fiscal year. The tax loss shall only be defined within the context of those losses which are reflected in either the tax base in accordance with the Article 60 of the Corporate Income Tax Law(hereinafter the “CITL”), the tax base determined or rectified in accordance with Article 66 of the CITL or the tax base amended in accordance with the Framework Act on National Taxes.
(2) Tax loss carryforward limitation
As from the tax year commencing on or after January 1, 2019, a company may carry forward tax losses from prior fiscal years to offset 60% of its taxable income of current fiscal year. Small-to-Medium Enterprises (“SMEs”) and certain companies set forth in Article 10 of Presidential Decree of CITL are however eligible to offset their tax losses against 100% of their taxable income.
(3) Carryforward period
In determination of a company’s tax base, the deductible tax loss carryforwards can be defined as the tax losses of the 10 fiscal years(or 5 fiscal years for fiscal years commencing before December 31, 2008) immediately preceding the beginning of the current fiscal year. The tax losses utilized in one fiscal year cannot be utilized again in future tax periods.
Setting off the tax loss carryforward stated above is a compulsory regulation; therefore, a company cannot randomly select the tax periods within the 10(or 5) fiscal years in which they wish to utilize their tax losses.
The tax loss carryforwards utilized would only refer to tax losses from prior years which are set off against a company’s taxable income of prior fiscal years, but tax losses claimed in following circumstances would also be deemed as tax loss carryforwards deducted against the taxable income of a company: i) tax loss carryforwards netted against gains on assets contributed or debt forgiveness, ii) tax loss carrybacks, and iii) tax losses which correspond to the gain on debt forgiveness from debt-equity swap of certain companies, which are not netted against tax loss carryforwards when such gain occurs but netted against the tax losses incurring in future tax periods.
The tax loss carryforward shall apply sequentially if the net operating losses incur in more than 1 fiscal year.
3. Concluding remarks
The tax loss carryforward ensures that the taxpayers have the ability to continue their businesses as going concern, and this month’s newsletter looked at the tax loss carryforwards that are set off against the taxable income of a company. Next month’s newsletter will expand on the topic and further explore other ways to claim the tax loss carryforwards.