Corporations, carry back of tax losses

June 10, 2010  |  Corporate tax administration

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In principle the Japanese tax system allows the carry back of tax losses to a prior tax year.   Regrettably however such loss carry back has been suspended since 1992 except in certain special circumstances discussed below.  This post discusses briefly the circumstances where a carry back of losses may be allowed for a company for Japanese tax purposes.  It also includes a translation of an article from the Japanese tax authority web site explaining in more detail critera, timing and other matters related to tax loss carry back.   If you are considering whether your company may be able to carry back losses it is essential that you plan well in advance, pay attention to time limits and also get proper professional advice (and not not rely solely on this site).

Carry back of losses on dissolution of a company

A tax loss can be carried back for a period of up to one year when a company is dissolved or deemed to be dissolved for tax purposes.  A key point to note here is that “dissolution” in this context does not include only the formal corporate law process of dissolution but can also include dissolution in substance, such as the sale of the whole of a business or also possibly ceasing business.  Given that such criteria are not “bright line” criteria they may introduce an element of subjectivity in determining whether loss carry back is available (for example, in relation to whether the business really ceased etc) so it is essential that professional advice is obtained on the subject without delay in order to make sure that time limits are met.

Carry back of losses for certain medium and small sized companies

As a special relief measure arising out of the financial crisis certain defined small and medium sized companies are allowed to carry back losses arising during and after the crisis period back to a prior year.  This measure applies for tax losses in tax years of medium and small sized companies ending on or after 1 February 2009.   More detail on the definition of medium or small sized companies is given in the tax authority home page site and translated below, but one key criteria is that the company is of course it being “medium or small sized” – i.e. it has capital (as defined) of JPY100m or less.   Furthermore  under the tax reform of 2010 if a medium or small sized company that would otherwise qualify for carry back of losses is a wholly owned subsidiary of a large company as defined (which includes companies with capital of JPY500m or more for example) then the carry back of losses is not available.

The 2010 tax reform also extended the suspension of the loss carry-back for companies other than medium and small sized companies or on dissolution for another two years i.e. to tax years ending on or before 31 March 2012.

Administrative procedures and information

Below is a translation of the Japanese tax authorities guidance on the carry back of losses and the original can be found in Japanese here.  The tax authority website also includes a page on procedures with the Japanese forms required to claim a refund on carry back for both consolidated and non consolidated companies.

Translation

No 5763  Repayment of tax further to a loss carry back
(Law and regulations at 1 April 2009)

1. Outline of the system
This system allows the carry back and repayment of corporation taxes.  Where a tax loss has arisen in the tax year in which a corporation tax return has been filed which is a “blue form” return (this year being referred to below as the “Loss Year”) then the loss can be carried back to tax years that began within one year of the day before the start of the Loss Year (below “Repayment Income Years”).

Note however that the application of this system, with the exclusion of (1) losses arising in respect of dissolution and similar of companies; and (2) defined small and medium sized businesses, is suspended for each tax year in which a loss arises that end in the period from 1 April  1992 up until 31 March 2010. [Note – such suspension has been extended].

2. Companies subject to the system
Companies which have filed a “blue form” tax return.

3 Calculation of the repayable amount
The amount of tax repayable is calculated as below:

Amount of corporation tax for the Repayment Income Year  x  ( amount of tax loss for the Loss Year (note below) / taxable income for the Repayment Income Year )

Note: the amount recorded in the request for repayment based on the corporation tax repayment calculation is the limit.  Also the denominator is a limit.

4 Conditions for application
All of the following conditions have to be met

  1. For each year continuously from the Repayment Income Year to the Loss Year a “blue form” tax return has to be submitted.
  2. A “blue form” tax return for the Loss Year has to be submitted within the deadline for submission of the tax return.
  3. At the same time as the submission of (2) above, a request for repayment on carry back of loss has to be submitted.

5. Exception for cases where in substance dissolution has arisen
In specified circumstances where in substance the company has dissolved – for example on corporate dissolution (note below), the sale of the whole of the business, the commencement of procedures for corporate rehabilitation further to the regulations of the corporate rehabilitation law and similar (below “Defined Dissolution Process”) – then for tax years that finished within one year of the day in which the facts of the Defined Dissolution Process arose and for the tax year including the year in which such facts arise, where a taxable loss arose, the application of this system is allowed. Note that in these  circumstances attention should be paid to the following points:

  1. the period for the submission of the request for repayment under 4(3) is within one year of the day in which the facts of the Defined Dissolution Process arose.
  2. For each year continuously from the Repayment Income Year to the Loss Year a “blue form” tax return has to be submitted.

Note: dissolution according to qualified tax mergers and qualified corporate splits that resemble a merger under the regulations of the Corporation Tax Law 57-2 are excluded from application.

6 Exception for defined medium and small sized persons
For defined medium and small sized businesses where a tax loss has arisen in tax years ended from 1 February 2009 to 31 March 2010 [Note – see above for extension further to 2010 tax revision] (excluding circumstances where (5) above applies), then the application of this system is allowed.   Defined medium and small sized businesses are as noted below:

  1. Out of ordinary companies under the rules of the Corporation Tax Law 2-9,  at the end of the financial year the amount of capital or the amount of capital contribution is JPY100m or below or companies that do not have a share capital or invested capital (excluding Japanese and foreign mutual companies under the insurance law).
  2. Public purpose companies under the Corporation Tax Law 2-6, or co-operative associations under Corporation Tax Law 2-7.
  3. The following companies deemed to be public purpose companies by law other than the corporate tax law: Approved local relationship groups, management co-operative companies, public housing management co-operative companies, political parties in corporate form, natural disaster prevention area business co-operatives, special non profit making companies and mansion renewal co-operatives.
  4. Associations without juridical character

Note: for each tax year in the period from the tax year following the tax year including the day in which the medium or small sized company was set up to the day five years from the start of that tax year and where a loss has arisen in these tax years that ended before 1 February 2009 then the application of this system is allowed.  In these circumstances refer to the definition in コード5444「中小企業技術基盤強化税制」の「2 適用対象法人」 (Code 5444 Tax System for strengthening the technical base of medium and small companies item 2 subject corporations).

(法法80、145、法令154の3、191、措法66の13、旧措法66の13、措令39の24、旧措令39の24、平21改正法附則47、法基通17-2-1)


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