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TAX TREAMENT ON TAX LOSSES

With effect from YA 2006, unabsorbed business losses will be subject to the continuity of ownership test. Such tax losses are only allowed to be carried forward and set off against future income where the DGIR is satisfied that more than 50% of the shareholders of the company on the last day of the basis period are the same as on he first day of the basis period in which such losses are to be utilised.

For the purpose of the above, the last day of basis period for the YA 2005 is deemed to be 30 September 2005 where a company’s basis period ends on or after 1 October 2005. Upon application to the Minister of Finance (MOF) under special circumstances, a company may be exempted from applying the continuity of ownership test.

The MOF has further clarified that a company with a substantial change in ownership will be allowed to carry forward its unabsorbed business losses if there is no substantial change of the ultimate sharheolder. A confirmation will be required from the external auditor or secretary of a public listed company or in their absence, the audit committee, financial controller or director. In the case, of a non-public listed company, the company could provide a list of ultimate shareholder as proof or a confirmation may be obtained from the external auditor or secertary or in their absence, the audit committee, financial controller or director of the company.

Further, the MOF has confirmed that a company with a substantial change of the ultimate shareholder for commercial purposes and not for tax driven purposes will be considered if the substantial change is the result of the following activities:

  • privatisation of government owned company;
  • nationalisation; and
  • government’s directive on reorganisatio, restructuring, mergers or takeover of a company.

The above requirement will be difficult to implement and may not be practical especially for public listed companies.

From the above, the rules was based on the year by year basis, so as long as the changes is NOT more than 50% of the shareholders each year, than the unabsorbed business losses and unabsorbed capital allowance are allow to carry forward.

However, by doing so, one must aware of the IRB’s right under S.140, Anti-avoidance provision.

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