Connect Biopharma Holdings LtdCNTB
Connect Biopharma Holdings Ltd Income Taxes Disclosure
Income Taxes
The components of net loss before income taxes for the years ended December 31, 2025 and 2024 are as follows (in thousands):
| December 31, | ||||||||
| 2025 | 2024 | |||||||
| U.S. net income before income taxes | $ | 747 | $ | 644 | ||||
| Foreign net loss before income taxes | (56,030) | (16,049) | ||||||
| Net loss before income taxes | $ | (55,283) | $ | (15,405) | ||||
The provision for income tax expense for the years ended December 31, 2025 and 2024 consisted of the following (in thousands):
| December 31, | ||||||||
| 2025 | 2024 | |||||||
| Current: | ||||||||
| Federal | $ | 196 | $ | 222 | ||||
| State | 1 | 1 | ||||||
| Income tax expense | $ | 197 | $ | 223 | ||||
A reconciliation of the statutory tax rates for the years ended December 31, 2025 is as follows:
| December 31, 2025 | ||||||||
| U.S. federal statutory tax rate | $ | (11,610) | 21.0 | % | ||||
| State and local income tax, net of federal benefit* | (19) | — | % | |||||
| Foreign tax effects: | ||||||||
| China | ||||||||
| Prior year return to provision | 4,759 | (8.6) | % | |||||
| Changes in valuation allowances | (2,930) | 5.3 | % | |||||
| Other | (716) | 1.3 | % | |||||
| Hong Kong | ||||||||
| Statutory tax rate difference between Hong Kong and Unites States | 5,750 | (10.4) | % | |||||
| Changes in valuation allowances | 3,592 | (6.5) | % | |||||
| Other | 128 | (0.2) | % | |||||
| Cayman Islands | ||||||||
| Statutory tax rate difference between Cayman Islands and United States | 1,287 | (2.3) | % | |||||
| Other foreign jurisdictions | (91) | 0.2 | % | |||||
| Federal research and development tax credits | (626) | 1.1 | % | |||||
| Changes in valuation allowances | 528 | (1.0) | % | |||||
| Non-taxable or non-deductible items | 111 | (0.2) | % | |||||
| Changes in unrecognized tax benefits | 34 | — | % | |||||
| Effective tax rate | $ | 197 | (0.3) | % | ||||
*California represents the tax effect for this category
A reconciliation of the statutory tax rates for the years ended December 31, 2024 is as follows:
| December 31, 2024 | |||||
| U.S. federal statutory tax rate | 21.0 | % | |||
| Stock options | (6.1) | % | |||
| Foreign rate differential | (32.6) | % | |||
| Unrecognized tax benefits | (7.9) | % | |||
| Valuation allowance | (20.9) | % | |||
| General business credits | 22.7 | % | |||
| Change of estimates and other | 22.3 | % | |||
| Effective tax rate | (1.5) | % | |||
Significant components of the Company’s deferred tax assets and liabilities from continued operations as of December 31, 2025 and 2024 were as follows:
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforward | $ | 68,452 | $ | 67,822 | |||||||
| Research and development credits | 4,989 | 4,853 | |||||||||
| Intangible assets | 170 | 192 | |||||||||
| Other | 2,666 | 2,105 | |||||||||
| Total gross deferred tax assets | 76,277 | 74,972 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use lease assets | (107) | (37) | |||||||||
| Total gross deferred tax liabilities | (107) | (37) | |||||||||
| Valuation allowance (U.S.) | (7,720) | (7,114) | |||||||||
| Valuation allowance (China, Hong Kong and Australia) | (68,450) | (67,821) | |||||||||
| Net deferred tax assets | $ | — | $ | — | |||||||
The Company has gross U.S. federal research and development tax credit carryforwards, before consideration of unrecognized tax benefits, of $5.4 million, which begin to expire in 2042. The Company also has U.S. state research credit carryforwards, before consideration of unrecognized tax benefits, of $1.1 million, which will carry forward indefinitely. The change in the U.S. valuation allowance was a decrease of $0.6 million for the year ended December 31, 2025. As of December 31, 2025, the Company has Net Operating Losses (“NOLs”) of $193.3 million in China, which begin to expire in 2026. The Company has NOLs of $225.8 million in Hong Kong and $5.0 million in Australia, which all carryforward indefinitely. The change in the China, Hong Kong and Australia valuation allowances was an increase of $0.6 million for the year ended December 31, 2025.
The following table summarizes the activity related to our unrecognized tax benefit reserves (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Balance at beginning of year | $ | 1,213 | $ | — | |||||||
| Decrease for tax positions of prior years | (95) | — | |||||||||
| Increase based on tax positions related to current year | 129 | 1,213 | |||||||||
| Balance at end of year | $ | 1,247 | $ | 1,213 | |||||||
Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefit reserves will not impact the Company’s effective tax rate. The Company’s policy is to recognize interest and penalties related to
income tax matters in income tax expense. For the years ended December 31, 2025 and 2024, the Company has not recognized any interest or penalties related to income taxes.
At December 31, 2025, the Company’s U.S. federal 2022 through 2024 tax years were open and subject to potential examination in one or more jurisdictions. In addition, the U.S., any NOLs or credits that were generated in prior years but not utilized in a year that is closed under the statute of limitations may also be subject to examination. As of December 31, 2025, the Company’s China returns for 2021 through 2025 tax years were open and subject to potential examination in one or more jurisdictions. The Company is currently not under any examinations in the jurisdictions it operates in.
On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was signed into law, introducing significant U.S.
tax changes. Key provisions of the OBBBA include changes to bonus depreciation, capitalized research and development
expenditures and interest deductibility. The OBBBA did not have a material impact on the Company’s effective tax rate or
consolidated financial statements for the year ended December 31, 2025.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 31, 2026 | Showing above |
| 2024 | Mar 31, 2025 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.