Loss Carryforward After Private Equity Acquisition
Delta Ltd, resident in Country Z, has $8 million of unused tax losses from manufacturing. In 2026 a private equity fund acquires 70% of Delta's shares. Delta sells its main plant, ceases manufacturing, and leases the plant to a logistics operator; it retains 15 of its 120 employees and the same tax identification number. Delta also acquires a profitable distribution business from the fund and claims to continue a similar trade. Country Z allows losses to be carried forward for seven years, but denies the carryforward after a change of more than 50% in ultimate ownership unless the company continues the same business with substantially the same assets and employees for at least two years after the change. A specific anti-avoidance rule disallows losses if the main purpose of the ownership change was to obtain a tax advantage. Delta's board minutes say the fund wanted a tax-efficient platform and projected the losses as an immediate cash benefit. The tax authority denies the losses.
1. Analyse whether the loss carryforward should be denied under the ownership-change and main-purpose rules.
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The 70% acquisition is a change of more than 50% in ultimate ownership, so the loss carryforward is conditional. Delta must continue the same business with substantially the same assets and employees for at least two years. It does not. Manufacturing has ceased, the main plant has been sold and leased back to a logistics operator, and only 15 of 120 employees remain. Acquiring a distribution business from the fund is not continuation of the manufacturing trade; it is a new activity. The same-business test therefore fails before the two-year period is complete.
The main-purpose rule provides an independent ground for denial. Board minutes describing the target as a tax-efficient platform and projecting the losses as an immediate cash benefit are strong evidence that obtaining a tax advantage was a main purpose of the acquisition. The commercial rationale for the distribution acquisition does not neutralize that evidence. The tax authority can deny the $8 million carryforward. Delta may argue that some manufacturing-related activities continue, but the asset and employee facts are weak. The better view is that the losses are not available against the new distribution profits.
2. What restructuring alternatives could preserve some or all of the losses, and what evidence and penalty risks should Delta manage?
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Alternatives. Delta could preserve the manufacturing business with substantially the same assets and employees for two years after the ownership change, postponing the sale and leaseback and the workforce reduction. It could acquire the distribution business in a separate entity so that new profits are not sheltered by old losses. An asset acquisition by the fund would leave the losses with Delta and would not create a carryforward into the fund's new business. A merger or business combination may be subject to separate loss-limitation rules and should not be assumed to preserve the losses. Delta should also test whether any losses can be used before the ownership change, subject to anti-abuse rules. A advance ruling on the same-business test may be available but should not be treated as a cure for the main-purpose facts.
Evidence and penalties. The board minutes are damaging. Delta should reconstruct the commercial rationale: why the plant sale, leaseback, and distribution acquisition made business sense independent of tax. It should document employee retention, asset continuity, and the fund's investment thesis. If the position is disclosed and supported, the risk is primarily denial of the loss and interest. If the losses are claimed without reasonable care, penalties for negligence or incorrect returns may apply. Delta should consider voluntary correction before audit and should avoid backdating documents or recharacterizing the distribution acquisition.