Offsetting of profit tax

Two important principles of tax law are the principle of periodicity and the principle of economic performance. They are often opposed to each other, although, all in all, neither can be systematically ranked above the other. However, in the case of loss offsetting, the periodicity principle is broken, and the importance of economic performance is prioritized. If you have questions pertaining to loss offsetting, our tax lawyers will be glad to help you.

Thus, the periodicity principle intends to ensure that a legal entity always pays tax on the profit generated in a given assessment period. It should be noted that the assessment period, tax period and financial year for a legal entity all coincide. However, which income or expenses are assigned to a given period is governed by the provisions of accounting law rather than the Federal Law on Direct Federal Tax.

To regulate the offsetting of losses, Art. 67 of the Federal Law on Direct Federal Tax breaks the periodicity principle and lends emphasis to taxation according to economic performance. The dominant view is that the total profit obtained between the initial formation to the liquidation of the company, is to be used as an objective measure of the economic performance. This view cannot dictate the entire calculation. According to Article 67, it remains possible to deduct losses from seven business years preceding the current tax period, insofar as they could not be taken into account in the calculation of the taxable net profit for these years. The term ‘loss’ is not further defined in the relevant Federal Law. According to the prevailing doctrine, the end-of-year loss (pursuant to Art. 67) of an income statement in conformity with commercial law is decisive for the offsetting of losses, if no earlier offsetting against taxable profits was possible. The loss carried forward is ultimately the sum of all ‘offsetable’ end-of-year losses. It is not clear from the law which losses are to be offset first. The prevailing doctrine and practice assume that the offsetting is carried out in the order in which the losses occurred. This means that the losses which lie in the furthest past are offset first. The offsetting of losses is only possible for future profits; offsetting losses against past profits is not permitted.

With Art. 67 para. 2, the seven-year loss offset option is supplemented by an extraordinary loss offset option that is unlimited in time. Thus, payments made to compensate for an underbalance in the context of a reorganization that do not constitute a capital contribution pursuant to Art. 60 lit. a Federal Law on Direct Federal Tax can also be offset as losses.

If you have any questions on the subject of offsetting losses or in the general region of the scope of tax law, please contact one of our tax lawyers.