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Taxation - China

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Previous Annual Losses of Enterprises make up for Hard-core Knowledge

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In the process of enterprise income tax settlement declaration, make up for the loss of the enterprise, as the carry-over involving cross-year data is relatively complex, in order to facilitate taxpayers to master the policy, familiar with the filling rules, we carried out the following knowledge points of the summary.

What is a loss in the tax policy?

The so-called loss refers to the enterprise in accordance with the enterprise income tax law and related regulations，total income per tax year less non-taxable income, tax-exempt income and less than zero after deduction.

How to stipulate the years of loss carry forward in previous years?

General regulations: The losses incurred by the enterprise in the tax year can be carried forward to the following year and made up with the income of the subsequent year, but the longest period of carrying forward shall not exceed five years.

Special regulations:

High-tech enterprises and technological SMEs

Starting from 1. January 2018, those enterprises that are qualified as high-tech enterprises or technology-based small and medium-sized enterprises that year have not yet made up for the losses incurred in the five years before the qualification year are allowed to carry forward to make up for the following years，the term is extended from 5 years to 10 years.

Difficult industries affected by the novel coronavirus epidemic

Enterprises in difficult industries (including transportation, catering, accommodation, and tourism (referring to travel agencies and related services, and management of scenic spots) that are affected by the epidemic in four major categories) losses in 2020, the longest carry-over period is 5 years Extension to 8 years. In other words, the losses incurred in 2020 can be recovered in the next 8 years.

Among them: the main business income of enterprises in difficult industries in 2020 must account for more than 50% of total income (excluding non-taxable income and investment income).

Calculation of the years of loss during the policy relocation of the enterprise

Where an enterprise ceases production and operation due to relocation and has no income, from the second year of the relocation year to the year before the completion of the relocation year. If the enterprise has suffered losses that have not been compensated in the previous year, it may be regarded as the year in which production and business activities are stopped, and it shall be deducted from the statutory loss carry-over period; if the enterprise moves and produces, its loss carry-over year shall be calculated continuously.

Whether the preparatory period of the enterprise is regarded as a loss year?

During the liquidation of an enterprise, it may make up for the previous year ’s losses according to law.

When an enterprise pays income tax in quarters, can it make up for the previous year's losses?

The enterprise may fill in the column of "less: make up for the previous year's losses" when reporting quarterly advance payment. Therefore, when the enterprise pays income tax in quarters, it can make up for the previous year's losses.

Can a legal partner of a partnership enterprise use the losses of the partnership enterprise to offset its profits?

If the partners of a partnership enterprise are legal persons and other organizations, the partners shall not use the losses of the partnership enterprise to offset their profits when calculating their corporate income tax.

If the division of an enterprise complies with the special reorganization regulations, can the enterprise's losses be carried forward between the divisional enterprises? How to calculate the compensation amount?

The income tax matters corresponding to the assets that have been split by the split enterprise shall be inherited by the split enterprise. The losses of the divided enterprises that have not exceeded the statutory compensation period may be distributed according to the proportion of the divided assets in the total assets, and the divided enterprises shall continue to make up.

If the business combination meets the special reorganization regulations, can the losses of the merged company be carried forward in the merged company? How to calculate the compensation amount?

The related income tax matters of the merged enterprise before the merger shall be undertaken by the merged enterprise. The limit of the losses of the merged enterprise that can be made up by the merged enterprise = the fair value of the merged enterprise's net assets × the longest period of national debt interest rate issued by the state at the end of the year when the merged business occurs.

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