Under different circumstances, the period for making up for overseas losses is different

According to the current tax policy, foreign losses are divided into non-actual losses and actual losses, and the tax treatment of different types of losses is different - non-actual losses can be carried forward to make up for indefinite periods, and actual losses can only be carried forward to make up for the next five tax years.

Policy Analysis

The Operational Guidelines for Overseas Income Tax Credit for Enterprises (Announcement No. 1 of 2010 of the State Administration of Taxation, hereinafter referred to as Announcement No. 1) clarifies that when calculating the overseas taxable income in the aggregate, if an enterprise establishes a branch in the same country (region) abroad without independent tax status, the loss calculated in accordance with the relevant provisions of the Enterprise Income Tax Law and the implementing regulations shall not be deducted from the taxable income in China or other countries (regions), but can be made up by other projects in the same country (region) or the income of subsequent years according to regulations.

At the same time, according to the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Improvement of the Overseas Income Tax Credit Policy for Enterprises (CS [2017] No. 84), starting from January 1, 2017, enterprises can choose to calculate their taxable income from overseas sources separately by country (region) (i.e. "no country (region) by country" or not by country (region) (i.e. "no country (region) without itemization"). Once selected, the tax credit cannot be changed for 5 years.

According to these two policies, the losses incurred by the overseas branches of "going out" enterprises shall not be offset by domestic profits, and if the credit method of "country (region) is not separated", the overseas losses cannot be offset by the profits of other overseas countries (regions). Announcement No. 1 further clarifies that the uncompensated part of the losses incurred by overseas branches due to the above-mentioned restrictions on carry-forward compensation is the amount of non-actual losses, and the period of carry-forward compensation is not subject to the five-year limit. That is, if the sum of the profit and loss at home and abroad in the current period is zero or positive, the uncompensated loss incurred by its overseas branch in the current year is not the actual loss, which can be carried forward to make up for it indefinitely. If the sum of the profits and losses obtained at home and abroad in the current period is negative, the actual losses of the overseas branches exceeding the profits of the enterprises shall be made up according to the time limit stipulated in Article 18 of the Enterprise Income Tax Law. To put it simply, the overseas uncovered losses arising from the impact of the overseas loss carry-forward are not actual losses, and on the contrary, they are actual losses. The non-actual loss shall be limited to the adjusted total taxable income at home and abroad of the enterprise in the current year, and the excess part shall be the actual loss. Non-actual losses can be carried forward indefinitely, and actual losses can only be carried forward to make up for the next 5 tax years.

Example 1: The sum of domestic and foreign income is positive

Company A is a Chinese resident enterprise and has set up branches in country A and country B respectively. In 2022, Company A achieved an operating profit of RMB 3 million in China, a branch in country A obtained an operating profit of RMB 1 million, a branch in country B incurred a loss of RMB 3 million, and an interest income of RMB 600,000 in country B. After calculation, the total amount of domestic and foreign income of Company A in 2022 is 1.6 million yuan (300+100-300+60).

Credit method 1: Country-by-country

According to the provision that overseas losses shall not be deducted from profits in China or other countries, the loss of RMB 3 million incurred by Company A in the branch of country B can only be made up by the interest of RMB 600,000 obtained from country B, that is, there is a loss of RMB 2.4 million (-300+60) that cannot be made up. Since the sum of Company A's domestic and foreign income is positive, the loss incurred by its overseas branch is a non-actual loss, that is, the loss of RMB 2.4 million of the branch in country B is an unactual loss.

After adjustment, the total taxable income of Company A at home and abroad in 2022 will be 4 million yuan, that is, the domestic taxable income of 3 million yuan and the taxable income from the branch of country A of 1 million yuan. Company A's taxable income in country B in 2022 is -2.4 million yuan, which is a non-actual loss, and company A is allowed to carry forward its income from country B in the following years to make up for it indefinitely.

Method 2: Regardless of country or item

Assuming that Company A adopts the tax credit method regardless of country or item, the overseas losses can be made up for each other among different countries (regions), that is, the loss of RMB 3 million of Company A of the branch of Company A in country B can be made up by its interest income of RMB 600,000 in country B, or by the operating profit of RMB 1 million obtained by the branch of country A, and the overseas taxable income after making up is -RMB 1.4 million (100-300 + 60).

According to the provision that overseas losses shall not be deducted from domestic profits, the loss of RMB 1.4 million incurred overseas by Company A in 2022 shall not be made up by the domestic profits of the enterprise in the current year. The sum of Company A's domestic and foreign income is positive, and the losses incurred by its overseas branches are non-actual losses. After adjustment, the total taxable income of Company A at home and abroad in 2022 is 3 million yuan, and the overseas taxable income is -1.4 million yuan, which is a non-actual loss, and Company A is allowed to carry forward the overseas income from the following years to make up for it indefinitely.

Example 2: The sum of domestic and foreign income is negative

Company B is a Chinese resident enterprise and has set up branches in country A and country B respectively. In 2022, Company B achieved an operating profit of RMB 1 million in China, a branch in country A obtained an operating profit of RMB 1 million, a branch in country B incurred a loss of RMB 3 million, and an interest income of RMB 600,000 in country B. After calculation, the total amount of domestic and foreign income of Company B in 2022 is -400,000 yuan (100+100-300+60).

Credit method 1: Country-by-country

According to the provision that overseas losses shall not be deducted from the profits of domestic or other countries, the loss of RMB 3 million of Company B's branch in 2022 can only be made up by the interest of RMB 600,000 obtained by Company B, and the non-actual loss of RMB 2.4 million that cannot be made up cannot be made up by other profits of Company B in the current year. The sum of the domestic and foreign income of Company B is negative, and the losses incurred by its branch in country B include both non-actual losses and actual losses.

Specifically, the total taxable income of Company B in the current year is 2 million yuan, including 1 million yuan of domestic taxable income and 1 million yuan of taxable income from the branch of country A. The taxable income of Company B from country B is -2.4 million yuan, of which the part limited to the taxable income of company B in 2022 (2 million yuan) is a non-actual loss, and company B is allowed to carry forward the income from country B in the following years to make up for it indefinitely; The remainder ($400,000) is the actual loss, which Company B can carry forward to make up for with its income from country B in the next five tax years.

Method 2: Regardless of country or item

Assuming that Company B adopts the tax credit method regardless of country or item, the overseas losses can be made up for each other in different countries (regions), that is, the loss of RMB 3 million of Company B can be made up by its interest income of RMB 600,000 in country B, or by the operating profit of RMB 1 million obtained by the branch of country A, and the overseas taxable income after making up for it is -RMB 1.4 million (100-300 + 60).

According to the provision that overseas losses shall not be deducted from domestic profits, the loss of RMB 1.4 million incurred overseas by Company B in 2022 shall not be made up by its domestic profits in the current year. Specifically, the total taxable income of Company B in 2022 is 1 million yuan (i.e., the domestic profit part). The overseas taxable income is -1.4 million yuan, of which the part within the taxable income of company B in the current year (1 million yuan) is a non-actual loss, and company B is allowed to carry forward the overseas income from the following years to make up for it indefinitely; The remaining part (400,000 yuan) is the actual loss, which Company B can carry forward to make up for in the next five tax years with its income from abroad.

Author: Dai Zhihui Source/Unit: Hunan Zhonghui Tax Agent Office