The Ministry of Finance (MoF) issued Guidance Letter No. 03-04-05/5577(2 February 2017), clarifying the issue of losses incurred by a controlled foreign company (CFC) on 7 March 2017.
The Ministry of Finance identified that, under Article 25.15, section 2 of the Tax Code (TC), the profits of a CFC will be equated to the income of the individual who is recognized as the controlling person of the CFC and will be taken into account in determining the taxable base for individual income tax purposes.
As specified in Article 25.15, section 5 of the TC, the controlling person of the CFC must file a tax return, taking into account the CFC profits, for the purpose of determining the taxable base of the CFC, as well as provide the documents required under that article. However, the MoF held that no tax return must be filed for individual income tax purposes and no supporting documents must be provided if the CFC incurred a loss.
Further, the MoF ruled, based on Article 309.1, section 7 of the TC, that if a loss is incurred by a CFC, as determined by the financial statements of the CFC, prepared for the financial year in accordance with its personal law, the loss may be carried forward to future periods without restrictions and may be deducted when determining the taxable base of the CFC.
However, under article 309.1, section 7.1 of the TC, CFC losses may not be carried forward if the controlling person of the CFC has not notified the tax authorities of the CFC of which he is a controlling person, for the period in which the loss was incurred.
