Tax loss carryforwards

Tax loss carryforward

1. Overview

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

(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 Corporate Income Tax Law (“CITL”), the tax base determined or rectified in accordance with the CITL or the tax base amended in accordance with the Framework Act on National Taxes.

(2) Tax loss carryforward limitation

A company may carry forward tax losses from prior fiscal years to offset 80% of its taxable income of the current fiscal year. Small-to-Medium Enterprises (“SMEs”) and certain companies stipulated in the CITL are however eligible to offset their tax losses against 100% of their taxable income.

(3) Carryforward period

In the determination of a company’s tax base, the deductible tax loss carryforwards can be defined as the tax losses of the 15 fiscal years 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 15 fiscal years in which it wishes to utilize its 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.

The tax loss carryforward shall apply sequentially if the net operating losses are incurred in more than one fiscal year.

3. Concluding remarks

The tax loss carryforward ensures that the taxpayers have the ability to continue their businesses as a going concern, and this month’s newsletter looked at the tax loss carryforwards that are set off against the taxable income of a company.