Legal regulation

The Income Tax Act makes it possible to deduct a tax loss from the tax base over the course of the five taxation periods immediately following the period for which the tax loss was assessed. However, the origination of tax loss also extends the statute of limitations. The statute of limitations for the loss-making taxation period as well as for the next five taxation periods for which the tax loss or its part can be utilised therefore ends at the same time as the statute of limitations for the last taxation period when the tax loss can be utilised (generally the fifth year after the loss).

In other words, the statute of limitations for the loss-making year and the following five taxation periods ends simultaneously, at the end of the statute of limitations for the last year. The Income Tax Act thus gives the tax administrator a longer period, by up to five years, to audit an incurred tax loss.

The tax administration’s practice

Based on the current tax administration’s practice, the statute of limitations is further extended if a tax loss is incurred during the five-year period for the utilisation of the tax loss (so-called tax loss chaining). In line with a tax administration internal methodological guideline, tax loss chaining postpones the statute of limitations for all the following loss-making years and subsequent years when these tax losses can be utilised, until the statute of limitations for the last year of this chain. In practice, this can lead to situations where the statute of limitations ends decades after the end of the first loss-making period. In an extreme case, the statute of limitations might not end at all.

The Supreme Administrative Court’s ruling

In May of this year, the Supreme Administrative Court rejected the tax administration’s perspective on statute of limitations with respect to tax loss chaining and took the side of legal certainty. According to the Supreme Administrative Court’s ruling, the tax administration’s interpretation does not respect the meaning of the Income Tax Act and unduly encroaches on the taxpayers’ legal certainty. Out of all of the possible interpretations of the Income Tax Act, the Supreme Administrative Court preferred the interpretation where the tax loss chaining is completely prohibited.

To summarise, the loss-making taxation period will be time-barred according to the statute of limitations for the last period when the tax loss can be utilised, while the statute of limitations for each taxation period has its own separate regime and cannot be chained. The Supreme Administrative Court’s ruling could thus have a major effect on the legality of many corporate income tax audits performed by the tax authority.

Will this change affect your company?

Is the tax authority conducting a corporate income tax audit of your company for a taxation period when the tax loss originated or a period when you utilised the tax loss?

Has your company been assessed an additional corporate income tax for a period for which the statute of limitations has been extended due to tax loss chaining?

In such cases, this ruling could be a possible defence reasoning for you in the dispute.