In the realm of taxation, understanding the intricacies of tax losses and their subsequent treatment is paramount for individuals and entities alike. This article delves into the provisions outlined in Law 91 of 2005, also known as the income tax law, shedding light on the legal framework governing the determination and treatment of taxable income, as well as the nuanced rules surrounding deductible and non-deductible expenses.
Determination of Taxable Income:
Taxable income is computed based on gross profit, excluding costs and expenses necessary for realizing profit. These expenses must meet specific criteria, as stated in Law 91 of 2005. Notably, the legislation requires that expenses be related to the entity's activity, essential for business operations, and supported by documented evidence, with e-invoices and e-receipts being mandatory from specified dates.
Law 91 of 2005 lists the elements of costs that're eligible for deduction from tax pool as follows:
- Interests on loans used in the activity, regardless of their value, after deducting the non-taxable or legally exempted credit interest.
- Tax depreciation of assets.
- Fees & taxes paid by the entity, except for the tax paid by the taxpayer according to this law.
- Social contribution paid by the entity paid in favor of its employees paid to the national authority for social insurance.
- Donations to the government, Local Authority Units and other public legal entities, whatever their value.
- Financial penalties and indemnities borne by the taxpayer resulting from his contractual liabilities.
The expenses & costs following are not deductible:
- Interests on loans used in the activity, regardless of their value, after deducting the non-taxable or legally exempted credit interest.
- Tax depreciation of assets.
- Fees & taxes paid by the entity, except for the tax paid by the taxpayer according to this law.
- Social contribution paid by the entity paid in favor of its employees paid to the national authority for social insurance.
- Donations to the government, Local Authority Units and other public legal entities, whatever their value.
- Financial penalties and indemnities borne by the taxpayer resulting from his contractual liabilities.
- Amounts that are set aside for the purpose of forming or funding different types of allocations, with the exception of the following:
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- A. 80% of the provisions for loans that banks are committed to form according to the rules of the preparation and presentation of financial statements and the assessment principles issued by the Central Bank.
- B. Technical provisions which insurance companies are obliged to form.
- Distributed shares of profits and dividends and attendance fees paid to shareholders for attending the general assembly.
- Membership remuneration and allowances received by Chairmen and members of the boards of directors.
- Employees' profit shares, which are distributed according to law.
When the final calculation of the tax base reveals a loss, that loss can be offset against profits in the following year, with any remaining loss carried forward for up to five years. However, in cases where there is a change in the legal structure of the company, losses can be carried forward, but subject to certain conditions.
Conclusion
Effectively managing tax treatment of losses and carryforwards necessitates a deep understanding of the legal framework established by Law 91 of 2005. By adhering to the criteria for deductible expenses and understanding loss carryforward rules, entities and individuals can achieve better financial planning and regulatory compliance. Professional consultation is recommended to navigate these complexities and protect financial interests efficiently.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.