Losses Chapter- 14
(4) Where the losses surrendered by a Subsidiary Company are not adjusted against income of
the Holding Company in the said 3 tax years, the Subsidiary Company shall carry forward the
unadjusted losses in the remaining 3 tax years.
(5) If there has been any disposal of shares by the Holding Company during the aforesaid period of
5 years to bring the ownership of the Holding Company to less than 55% or 75%, as the case
may be, the Holding Company shall, in the year of disposal, offer the amount of profit on which
taxes have not been paid due to set off of losses surrendered by the subsidiary company.
(6) Loss claiming company shall, with the approval of the Board of Directors, transfer cash to the
loss surrendering company equal to the amount of tax payable on the profits to be set off
against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as
a taxable event in the case of either of the two companies.
(7) The transfer of shares between companies and the shareholders, in one direction would not be
taken as a taxable event provided the transfer is to acquire share capital for formation of the
group and approval of the Securities and Exchange Commission of Pakistan or State Bank of
Pakistan, as the case may be, has been obtained in this effect. Sale and purchase from third
party would be taken as taxable event.
Example: TS (Pvt.) Ltd., a fast growing IT solution provider, a wholly owned subsidiary of a listed
company, commenced its operations in 20 18. The details of tax losses incurred by the subsidiary
company are as follows:
Accounting year Tax year Losses as per return Assessed losses
Rs. Rs.
June 30, 20 19 2019 5,750,000 4,500,000
June 30, 20 20 2020 4,800,000 3,782,500
June 30, 20 21 2021 4,200,000 3,500,100
June 30, 20 22 2022 3,711,800 3,050,000
June 30, 20 23 2023 2,750,800 2,200,000
One of the directors is of the view that the holding company can set off the losses of its subsidiary. As
a Tax Consultant, you are required to advise on the following:
(i) What are the pre-requisites for claiming the losses of the subsidiary?
(ii) How much amount can the holding company claim against the subsidiary’s losses?
Solution:
(i) For solution of this part see the material given u/s 59B above.
(ii) After fulfillment of all the conditions as stated above the loss of the current year 20 23 Rs.
2,200,00 0 may be adjusted against the profit of the Holding Company for the tax year 20 23 or
against the profit of another subsidiary of the holding company. The brought forward losses are
not allowed to adjust against the Holding Company profit however the Subsidiary Company
shall carry forward the preceding year’s losses in normal way.
(iii) If the holding company assumed to have 80% holding in subsidiary company then loss of tax
year shall also be surrendered to this extent i.e. 1,760,000 = Rs. 2,200,000 x 80%. The
surrender of loss in the proportionate of holding ratio is applicable with effect from tax year
2018 to onwards. However previously the loss of a subsidiary company to holding company or
another subsidiary of the holding company, was surrendered without any proportionate holding
in subsidiary by the holding company.
CHANGE IN CONTROL OF AN ENTITY [98]
Where there is a change of fifty percent (50%) or more in the underlying ownership of an entity then
any loss incurred for a tax year before the change shall not be allowed as deduction (set-off) in the
tax year after change.
However, the above provision shall not apply if the following conditions are fulfilled:- The entity continues to conduct the same business until the loss has been fully set off; and
- The entity does not engage in any new business or investment after the change until the loss
has been fully set off.