The Federal Board of Revenue (FBR) has issued an updated version of the Income Tax Ordinance, 2001 to explain tax treatment of losses under group relief.
The amendment to the ordinance have been introduced through the Finance Act, 2021.
Within this ordinance, Section 59B holds significant importance as it outlines the tax treatment of losses under group relief. This provision offers opportunities for companies, particularly subsidiaries and holding companies, to manage their assessed losses efficiently.
Section 59B(1) allows any company, which is a subsidiary or holding company, to surrender its assessed loss for a specific tax year in favor of its holding company, subsidiary, or another subsidiary under certain conditions. Notably, this provision excludes capital losses, brought forward losses, and capital losses from the scope of the surrendered loss. Moreover, it introduces specific ownership criteria, with different percentages for listed and non-listed companies. Specifically, for a listed company within a group, the holding company should directly hold fifty-five percent or more of the share capital of the subsidiary company. In contrast, for non-listed companies, the holding company should have a direct share capital ownership of seventy-five percent or more.
The calculation of the loss to be surrendered is explained in Section 59B(1A). The formula for calculating the surrendered loss is (A/100) x B, where A represents the percentage of share capital held by the holding company in its subsidiary company, and B represents the assessed loss of the subsidiary company.
Section 59B(2) outlines the conditions under which the loss surrendered by the subsidiary company can be claimed by the holding company or a subsidiary company for offsetting against their income from business in the tax year and the following two tax years. These conditions include maintaining share capital ownership for five years, adhering to business activities that are not trading-related, and ensuring corporate governance and group designation compliance as specified by the Securities and Exchange Commission of Pakistan.
Additionally, Section 59B(3) limits the subsidiary company’s ability to surrender its assessed losses for set-off against the holding company’s income to three tax years. Any unadjusted losses after this period are to be carried forward in accordance with Section 57.
A crucial point highlighted in Section 59B(5) is the tax consequences of any disposal of shares by the holding company during the five-year ownership period. If the ownership of the holding company falls below the required percentage during this time, the holding company must report and pay taxes on the profits that were previously offset by the surrendered losses.
To facilitate the loss transfer process, Section 59B(6) specifies that the loss-claiming company must transfer cash to the loss-surrendering company to cover the tax payable on the profits set off against the acquired loss. This transfer of cash does not constitute a taxable event for either company.
Section 59B(7) clarifies that the transfer of shares within the group, either among companies or to shareholders, is not considered a taxable event as long as it is done to acquire share capital for the formation of the group. However, sales and purchases from third parties are considered taxable events.
In summary, Section 59B of the Income Tax Ordinance, 2001, provides a mechanism for group relief and loss treatment, allowing companies to efficiently manage their assessed losses while adhering to specific ownership and compliance conditions. This provision aims to strike a balance between facilitating business operations and maintaining tax compliance in the corporate sector.
