Tax Loss Carryforward in Uzbekistan: Rules and Limits

What counts as a tax loss

A tax loss is not the same as a loss in the financial statements. Under part one of Article 333, a loss is the excess of deductible expenses over aggregate income, taking into account the income and expense adjustments provided for in the profit tax section of the Code. In other words, income and expenses are first determined under tax rules — non-deductible expenses (Article 317) are excluded and exempt income is left out — and only then is the result calculated.

Transactions in traded securities and traded derivative financial instruments are singled out: losses on them are treated as losses from business activity (part two of Article 333) and enter the general calculation. Non-traded securities and instruments follow a different rule, covered below.

How much profit a loss can offset

A taxpayer that incurred a loss in a previous tax period (or periods) may reduce the profit of the current tax period by the full amount of that loss or by part of it (part three of Article 333). It is a right, not an obligation: the company decides how much of the loss to use in a given year.

Parts four and five of Article 333 were repealed by Law No. ZRU-741 of 29 December 2021. The current wording of the article sets neither a maximum carryforward period nor a cap on the share of profit a loss can offset. If older materials mention such limits, check which version of the Code they rely on.

• a loss is applied only on the results of the current tax period (part six of Article 333);
• losses from several calendar years are carried forward in the order in which they were incurred (part seven of Article 333) — the earliest first.

When a loss is applied: year-end only

For profit tax, the tax period is the calendar year and the reporting period is the quarter (Article 338). Tax for a reporting period is calculated on a cumulative basis from the start of the year (Article 339). However, the tax base can be reduced by prior-year losses only on the results of the current tax period — in the annual return, not in the quarterly ones.

In practice, a company with an old loss may pay tax on its quarterly calculations during the year and reflect the reduction from the loss in the annual return. The annual profit tax return is filed no later than 1 March of the year following the tax period (Article 339). Plan cash flow accordingly.

Losses that cannot be carried forward or are ring-fenced

Not every loss can be set against general profit. Part eight of Article 333 expressly prohibits carrying forward losses of a bank's subsidiary that acquires bad debts from its parent bank. Article 336 sets up ring-fenced baskets in which a loss is covered only by income of the same kind:

• a loss on the sale or other disposal of an interest in the charter fund (charter capital) of a legal entity, or of an enterprise as a property complex, is offset against income from the sale (disposal) of similar assets;
• losses under a trust management agreement are not taken into account in the tax base of the settlor or beneficiary and are carried forward to future income from that trust management;
• losses of participants in a simple partnership are carried forward by the managing partner to future income of that partnership;
• losses of ancillary (service) operations are determined in aggregate, are not taken into account in the business-activity tax base and are carried forward to future income of those operations;
• losses on non-traded securities and non-traded derivative financial instruments are determined separately and offset against income from similar transactions.

Reorganisation and consolidated groups

On a reorganisation, losses are allocated among the successors in proportion to the share of the value of assets transferred under the separation balance sheet in the total assets of the reorganised entity, and are then carried forward under the general rules of Article 333 (Article 334). The restriction: if the successor itself is reorganised, losses it received from a taxpayer that had ceased to exist cannot be carried forward any further. Multi-step restructurings involving tax losses should therefore be modelled in advance.

In a consolidated group of taxpayers, the group's prior-period loss reduces the consolidated tax base — this is a right of the responsible participant (Article 335). After leaving the group, or once the group ceases to exist, a participant may not use the loss incurred by the group, but may use its own losses for periods in which it was not a group member.

Permanent establishment of a non-resident

A similar rule applies to a non-resident operating through a permanent establishment: net profit for the current tax period is reduced by the total losses of previous periods incurred within the same permanent establishment, provided they have not been used before (Article 347). Losses of different permanent establishments are not pooled.

Documents and correcting errors

The tax authority may verify a prior-year loss, so it must be supported by accounting records — primary documents, accounting registers and other documents on which the tax calculation is based (Article 76). The general retention period for tax returns and supporting documents is at least three years following the year of filing (Article 84); if a loss is carried forward for longer, it is sensible to keep the records for the year the loss arose until it is fully used.

If a loss was not reported or was miscalculated, the return is corrected by filing an amended return under Article 83. Where the error did not lead to underpaid tax, the taxpayer may file an amended return, and filing it after the deadline is not treated as late filing. If the loss was overstated and tax was underpaid, the correction is mandatory.