Ministry of Finance - Tax Department - 2013 [Executive Rules & Instructions]
Executive Rule No. 46 Concerning the method of calculating the losses carried forward
Article No. 7 of the Executive Regulations:
Losses shall be carried forward as follows:
First: If the account of one year ends with a loss, this loss is deducted from the net income of the following year. Accordingly, if the profit does not cover the loss entirely, the remaining loss is carried forward to the second year. In case any loss remains after this, it is carried forward to the third year. No remaining loss shall be carried forward after the third year.
Second: The loss shall not be carried forward in the case of ceasing the activity. This is represented by the Incorporated Body notifying the Ministry of Finance of this cease in activity or submission of a tax declaration free of any revenues resulting from its main activities.
Third: The maintenance period stipulated in the contract or agreed upon in a subsequent agreement shall not be considered as a cease of activity.
Fourth: Compulsory cease of activity periods shall not be accounted for as a cease of activity.
Fifth: The rights of any Incorporated Body to carry forward losses deducted during the tax period(s) pertaining to practicing activity during which such losses are incurred shall be forfeited in the following cases:
Liquidation of the Incorporated Body
Changing the legal form of the Incorporated Body or its closing
Merging the Incorporated Body with another Incorporated Body.
Sixth: Losses will not be carried forward, as stipulated in Item 1, in the case of compulsory cease of activity such as force majeure or emergency circumstances.
Seventh: Approved and carried forward losses under the income tax Decree No (3) of 1955 shall be carried forward for 3 years, effective from the first financial year after the implementation of the income tax Decree No (3) of 1955 and its amendments, amended by law No (2) of 2008.
Eighth: Special and exceptional cases relating to the method of calculating carried forward losses shall be treated separately after consulting the Tax Department in this regard.
Example:
First case: Carried forward losses exceed realized profits:
The loss of a Incorporated Body amounted to (KD 500,000) as per the tax assessment letter and the result of the tax assessment for the following three financial years was as follows:
Year | Net profit |
First | 200,000 |
Second | 100,000 |
Third | 100,000 |
Tax treatment for carrying forward the losses is as follows:
The statement | First | Second | Third |
approved loss | (500,000) | ||
Carried forward loss | (300,000) | (300,000) | |
Carried forward loss | (200,000) | (200,000) | |
Loss not carried forward | (100,000) |
Second case: Carried forward losses are less than realized profits:
The loss of a Incorporated Body amounted to (KD 500,000) as per the tax assessment letter and the result of the tax assessment for the following three financial years was as follows:
Year | Net profit |
First | 200,000 |
Second | 250,000 |
Third | 100,000 |
Tax treatment for carrying forward the losses is as follows:
| Year | First | Second | Third |
|---|---|---|---|
The approved loss | (500,000) | ||
Carried forward loss | (300,000) | (300,000) | |
Carried forward loss | (50,000) | (50,000) | |
Taxable net profit | 50,000 | ||
Tax due @ 15% | 7,500 |
Third Case: Carried forward loss before the new law
An Incorporated Body incurred a loss amounting to (KD 100,000) as per the tax assessment letter subject to the Decree, prior to its amendment. The result of the tax assessment for the four fiscal years was as follows:
Year | Net profit (loss) |
First | (50,000) |
Second | 75,000 |
Third | 50,000 |
Fourth | 80,000 |
Tax treatment for carrying forward the losses is as follows:
| Year | First | Second | Third |
|---|---|---|---|
The loss approved before applying the amendment of the Decree carried forward for the first year | (100,000)* (50,000) | ||
The loss approved before applying the amendment of the Decree carried forward for the second year | (100,000)** | ||
The loss approved before applying the amendment of the Decree carried forward for the third year | (25,000)*** (50,000)** | ||
Loss of the first year carried forward to the third year | (25,000)*** | ||
Taxable net profit | 55,000 | ||
Tax due @ 15% | 8,250 |