The carry-forward of tax losses

A company that closes a financial year at a loss should not consider it lost from a tax point of view. Swiss law allows losses to be carried forward and offset against the profits of subsequent years, thereby reducing the profit tax in the years in which the business returns to the black. It is a valuable mechanism, especially for young enterprises, which in their early years invest more than they earn.

The carry-forward principle

The Swiss system recognises the carry-forward of losses: an unoffset operating loss can be deducted from the taxable profits of the following years, within a limited number of tax periods. There is, however, no carry-back: you cannot recover taxes already paid on the profits of previous years by offsetting them with subsequent losses.

This applies both to the direct federal tax and, in principle, to the cantonal and communal taxes, which follow the same logic.

The duration of the carry-forward

Losses can be carried forward for a defined number of financial years following the one in which they arose. Once that time limit has passed, the part of the loss not yet offset lapses and can no longer be used. This is why the order and timing of offsetting matter: an old loss must be used before its carry-forward window expires.

The practical rule that follows is simple: the oldest losses should be offset first, so as not to leave unused those nearing expiry.

How they are offset against profits

In calculating the taxable profit of a year in which the company has returned to the black, the still-available carried-forward losses are deducted. If the year’s profit is not enough to absorb all the prior losses, the residual part continues to be carried forward in the years still open. If, on the other hand, the profit is sufficient, the losses are used up and from that point tax again strikes the entire profit.

Bear in mind that carried-forward losses reduce the taxable base, not the tax directly: the effect on the saving therefore depends on the applicable rate.

The case of restructuring

A delicate point concerns restructuring operations. When a company in difficulty is recapitalised or receives contributions aimed at covering losses, the tax treatment of such contributions and the fate of the carried-forward losses must be assessed carefully. Some restructuring contributions may affect the use of prior losses. It is a technical area in which the correct framing of the operation makes the difference between preserving the benefit and losing it.

Beware of substantial changes

The carry-forward of losses presupposes a continuity of the business. Operations that radically change the activity, the ownership or the economic substance of the company — such as certain changes of control combined with the emptying of the original business — may call into question the right to use accumulated losses, if the tax authority considers it to be a mere “trade” in losses. Anyone acquiring or restructuring a company with carried-forward losses must therefore verify whether the benefit is actually transferable.

Documenting so as not to lose the right

The carry-forward works only if the losses are correctly determined and documented year by year:

• Regular and consistent annual accounts, from which the loss clearly results.
• Tax returns filed even in the loss years, so that the authority records the amount available for carry-forward.
• Traceability of the order in which the losses arose, in order to manage the deadlines correctly.

Neglecting the return in a loss year, thinking that “there is no tax to pay anyway”, is a mistake: it makes it harder to assert that loss when it is needed.

How we work

At SIH ONE we keep track of the carry-forward losses year by year, managing the order of offsetting to prevent them from expiring unused and coordinating the matter with any restructuring or reorganisation operations. We file the returns even in the loss years, so that the right to the carry-forward remains documented and available when the business returns to profit. The accounting is pre-processed by our systems and validated by a qualified professional.

Do you want to be sure not to lose your company’s carry-forward tax losses? Let us check your position.