ACCA Advanced Taxation (ATX) Practice Exam

What limits the maximum loss that can be claimed by group companies?

1. Limited to their cash reserves

2. Limited to their taxable total profits for the period

3. No limits exist for claiming losses

4. Limited to their equity value

The correct answer is: Limited to their taxable total profits for the period

The maximum loss that can be claimed by group companies is limited to their taxable total profits for the period. This principle stems from the framework of taxation, which allows companies to offset their taxable profits with losses incurred within the group to reduce their overall tax liability. The taxable total profits represent the income that is subject to tax, and therefore, any loss claimed cannot exceed this amount since only profits can be offset by losses. This ensures that the tax system maintains its integrity by not allowing companies to generate tax refunds or relief beyond what they actually have in taxable profits. The notion is to prevent excessive claims that might distort the tax base. While other options suggest different limitations, they do not accurately reflect the regulatory framework governing the offset of losses in group company situations as effectively as the specified option does. Losses cannot exceed the amount of taxable profits since such claims are grounded in the actual profit-generating results of the businesses involved.