Retroactive Deduction of Losses

Date: June 12, 2020

I. Introduction

Retroactive deduction of losses refers to asystem to provide a deduction from the tax amount paid in immediately preceding business year which is equivalent to the losses in the current year. This post will present a brief picture about retroactive deduction of losses.

 

II. Requirements

1. Applicable corporations

① Small and medium enterprises prescribed in Article 2 of the Enforcement Decree of the Restriction of Special Taxation Act.

② The judgement whether a corporation is a small and medium enterprise is based on the business year which occurred losses. Therefore, where a domestic corporation is not a small and medium enterprise in the preceding year but in the current year it is subject to retroactive deduction of losses.

 

2. Requirements

① The small and medium enterprises prescribed in Article 2 of the Enforcement Decree of the Restriction of Special Taxation Act that meet the following requirements.

② Application conditions should be strictly applied due to the exceptionality of the deduction.

③ A domestic corporation should have corporate tax to pay for the income in the preceding year.

④ A domestic corporation should have losses occurred in the current year

⑤ A domestic corporation should file a report on the tax base and amount of the corporate tax on income for the business year in which the losses incur and for the immediately preceding business year by the filing deadline

⑥ A domestic corporation which intends to obtain a refund of corporate tax shall file an application to the head of the tax office having jurisdiction over the place of tax payment until the filing deadline.

⑦ Where a domestic company fails to file an application within the deadline, it is not be able to get a retroactive deduction of losses by filing a claim for rectification.

 

3. Applicable Period

The applicable period for the retroactive deduction of losses is for one business year not a calendar year. Therefore, where a one business year is six monthsthe filing should be claimed for the six months.

 

4. The amount of tax to be refunded

(1)Corporate Tax Refund

The smallest amount among the following will be refunded;

① The amount of tax to be refunded: Calculated corporate tax amount of the immediately preceding year (- tax base of the immediately preceding year– the amount of retroactive deduction of losses) x tax rate of the immediately preceding year

② Ceiling Amount (the amount of corporate tax of the immediately preceding year) = Calculated tax amount of the immediately preceding year –deducted amount

 

(2) Local Income Tax

The smallest amount among the following will be refunded

① The amount of tax to be refunded: Calculated corporate local income tax amount of the immediately preceding year (- tax base of the immediately preceding year – the amount of retroactive deduction of losses) x tax rate ofthe immediately preceding year

② Ceiling Amount (the amount of corporate local income tax of the immediately preceding year) = Calculated tax amount of the immediately preceding year – deducted amount

 

5. Re-determiningof Tax refund

Where the amount of corporate tax or the amount of tax base for the immediately preceding business year, based on which the initial tax refund has been calculated, changes after such initial tax refund is determined, the head ofthe tax office having jurisdiction over the place of tax payment shall immediately re-determine the initial tax refund and either give additional refund or collect the amount equivalent to the amount of tax over-refunded.

 

IV. Related Laws and Regulations

☞ Article 72(Refund by Retroactive Deduction of Losses)

 

(1)  Where a small and medium enterprise underArticle 25 (1) 1 has losses incurred for each business year as prescribed inArticle 14 (2), it may apply for a refund of the amount calculated, asprescribed by Presidential Decree, up to the limit of corporate tax (referringto the amount of corporate tax prescribed by Presidential Decree) imposed onincome during the business year immediately preceding the business year inwhich such losses incurred. In such cases, such losses shall be construed asthe deducted amount in applying subparagraph 1 of Article 13.

 

(2)  A domestic corporation which intends to obtain a refund of corporate tax under paragraph (1) shall file an applicationto the head of the tax office having jurisdiction over the place of tax payment until the filing deadline specified in Article 60, as prescribed by Presidential Decree.

 

(3)  Upon receipt of an application under paragraph (2), the head of the tax office having jurisdiction over the place of tax payment shall, without delay, determine the amount of tax to be refunded and refund it under Articles 51 and 52 of the framework Act on National Taxes.

 

(4)  Paragraphs (1) through (3) shall apply onlywhen a domestic corporation files a report on the tax base and amount of the corporate tax on income for the business year in which the losses incur and forthe immediately preceding business year by the filing deadline specified inArticle 60.

 

(5)  In any of the following cases, the head ofthe tax office having jurisdiction over the place of tax payment shall collectan amount computed by adding an amount equivalent to the interest calculated,as prescribed by Presidential Decree, to the amount of tax to be refunded (the amount equivalent to the tax amount over-refunded in cases of subparagraphs 1and 2) as corporate tax for the business year in which the relevant losses have been incurred:

 

1.  Where losses have decreased after correcting the tax base and the amount of corporate tax for the business year in which the losses incurred after corporate tax was refunded, as prescribed in paragraph(3);

 

2.  Where the amount of tax to be refunded has decreased as a result of the rectification of the tax base and tax amount for corporate tax for the business year immediately before the business year in which the losses were incurred;

 

3.  Where a corporation, other than small and medium enterprises defined in Article 25 (1) 1, has received a refund of corporate tax.

 

6)  Matters concerning the calculation of the amount of tax to be refunded by retroactive deduction of losses and other necessary matters shall be prescribed by Presidential Decree.

 

☞ Article 110 (Calculation of Tax Refunds by Retroactive Deduction of Losses)

 

(1)  "Amount of corporate tax prescribed by Presidential Decree" in the former part of Article 72 (1) of the Act means the amount of corporate tax calculated for the immediately preceding business year (excluding the corporate tax on capital gains on transfer of land, etc.under Article 55-2 of the Act; hereafter the same shall apply in this Article) minus the amount of corporate tax deducted, reduced or exempted (hereinafter referred to as "amount of tax reduced or exempted") from the corporate tax on income for the immediately preceding business year (hereafter referred to as "amount of corporate tax for the immediately preceding business year" in this Article).

(2)  "Amount calculated, as prescribed by Presidential Decree" in the former part of Article 72 (1) of the Act means the amount under subparagraph 1 minus the amount under subparagraph 2:

 

2.  The amount calculated by applying the tax rate of the immediately preceding business year to the balance of the tax base of the immediately preceding business year minus the amount for which retroactive deduction as losses for the relevant business year under Article 14(2) of the Act (up to the tax base of the immediately preceding business year; hereafter referred to as "amount of retroactively deducted losses" inthis Article).

 

(3)  A corporation which intends to obtain refund under Article 72 (2) of the Act shall file an application (including filing such application through the national tax information and communications network) for refund of retroactively deducted corporate tax in the form stipulated by Ordinance of the Ministry of Economy and Finance within the filing deadline specified under Article 60 of the Act to the head of the tax office having jurisdiction over the place of tax payment.

 

(4)  The amount of corporate tax to be collected as losses have decreased under Article 72 (5) of the Act shall be calculated by the following formula: Provided, That where only some losses referred to in Article 14 (2) of the Act have been retroactively deducted, the losses which have not been retroactively deducted shall be deemed to have been firstreduced:

 

(5)  "An amount equivalent to the interest calculated, as prescribed by Presidential Decree" in Article 72 (5) of the Act, with the exception of its subparagraphs, means the amount calculated by multiplying the amount under subparagraph 1 by the rate under subparagraph 2:

 

1.  The amount of tax refunded under Article 72(5) of the Act;

 

2.  3/10,000 per day beginning from the day following the notice date of the initial tax refund until the notice date ofthe amount of corporate tax collected under Article 72 (5) of the Act: Provided, That where there are justifiable grounds for a taxpayer to obtain the excess refund of corporate tax, the interest rate provided for in Article 43-2 of the Enforcement Decree of the framework Act on National Taxes shall apply.

 

(6)  Where the amount of corporate tax or the amount of tax base for the immediately preceding business year, based on which the initial tax refund has been calculated, changes after such initial tax refund is determined, the head of the tax office having jurisdiction over the place of tax payment shall immediately re-determine the initial tax refund and either give additional refund or collect the amount equivalent to the amount of tax over-refunded.

 

(7)  In re-determining the initial tax refund under paragraph (6), where the amount of retroactively deducted losses is in excess of the amount of tax base, the amount of losses in excess shall not be construed as retroactively deducted losses.

 

 

 

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