Calculation of Carry Forward Losses

Hong Kong Carry Forward Loss

Carry forward losses in Hong Kong can be a valuable tool for businesses to reduce their tax liability. Here's a breakdown of how they work:   

What are carry forward losses?

Carry forward losses refer to the losses incurred by a business in a specific year that can be offset against future profits in subsequent years. This means that if your business experiences a loss in one year, you can use that loss to reduce your taxable income in future years, effectively lowering your tax bill.   

How are carry forward losses calculated?

The calculation of carry forward losses in Hong Kong is relatively straightforward. It involves the following steps:

1. Determine the loss: Calculate the net loss for the relevant year of assessment. This is done by deducting all allowable expenses from the total income for that year.

2. Carry forward the loss: The calculated loss can be carried forward indefinitely until it is fully utilized against future profits.   

3. Offset against future profits: In subsequent years, the carry forward loss can be offset against the taxable profits of the same business. This reduces the taxable income and, consequently, the amount of tax payable.   

Important considerations:

• Loss company purchase: There are specific anti-avoidance rules in place to prevent the purchase of a loss company solely for the purpose of obtaining a tax benefit.

• Currency conversion: If your accounts are kept in a currency other than Hong Kong dollars, the carry forward loss must be converted into Hong Kong dollars using an appropriate exchange rate for the year of assessment.

Example:

Let's say your business incurred a loss of HK$100,000 in Year 1. In Year 2, your business made a profit of HK$50,000. You can offset the HK$50,000 profit with the HK$100,000 carry forward loss, resulting in no taxable income for Year 2. The remaining HK$50,000 of the carry forward loss can be carried forward to future years.

Additional resources:

• Inland Revenue Board of Review Decisions: https://www.ird.gov.hk/eng/tax/bus_pft.htm

• Tax Guide For Hong Kong - HSBC Expat: https://taxsummaries.pwc.com/hong-kong-sar/individual/taxes-on-personal-income

• HKAS 12 Income taxes - HKICPA: https://www.hkicpa.org.hk/hksaebk/HKSA_Members_Handbook_Master/volumeII/hkas12.pdf

• Profits Tax - IRD: https://www.ird.gov.hk/eng/tax/bus_pft.htm

• Hong Kong Tax Guide 2024 - Bestar: https://www.bestar-hk.com/post/hong-kong-tax-guide-2024

How Bestar can Help

Bestar can provide invaluable assistance in understanding, calculating, and maximizing the benefits of carry forward losses in Hong Kong. Here's how we can help:

1. Accurate Calculation:

• Complex Scenarios: We can handle complex scenarios involving multiple business entities, different accounting periods, and various types of income and expenses. 1    

• Compliance with Regulations: We ensure that the calculations comply with the latest tax regulations and guidelines issued by the Inland Revenue Department (IRD).

2. Effective Utilization:

• Strategic Planning: We can help you develop a strategic plan to utilize the carry forward losses effectively by timing your income and expenses to maximize the tax benefits.

• Identifying Opportunities: We can identify potential opportunities to offset other taxable income or gains with the carry forward losses, reducing your overall tax liability.

3. Risk Mitigation:

• Anti-Avoidance Rules: We are aware of the anti-avoidance rules and can help you structure your business affairs to comply with the regulations while maximizing the benefits of carry forward losses.

• Documentation: We can help you maintain proper documentation to support your claims for carry forward losses, reducing the risk of audits and penalties.

4. Staying Updated:

• Tax Law Changes: We stay updated on any changes in tax laws and regulations that may affect the calculation and utilization of carry forward losses.

• Best Practices: We can advise you on best practices for managing carry forward losses and ensuring compliance with tax obligations.

5. Representation and Advocacy:

• IRD Audits: If you are selected for an IRD audit, we can represent you and advocate on your behalf to ensure that your carry forward loss claims are properly assessed.

• Dispute Resolution: In case of disputes with the IRD, we can provide expert advice and support to resolve the issues efficiently.

By engaging Bestar, you can have peace of mind knowing that your carry forward losses are being handled correctly and that you are maximizing the tax benefits available to your business.

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