OVERDUE CREDIT CARD LOANS TO BE RECORDED AS BAD DEBTS

07/01/2002

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Article 49 Paragraph 5 of the Income Tax Law provides that accounts receivable, notes receiv-able and other items of uncollected credit may be recorded as realized losses from bad debts under either of the following circumstances:

All or part of the outstanding amount is irre-coverable due to insolvency, abscondment, arrangement, or declaration of bankruptcy.

The outstanding amount is overdue by two years or more, and no payment of principal or interest has been received despite demands for payment.

If an outstanding amount is collected after being entered as a loss, the amount collected should be recorded as income for the year in which it is collected.

In a ruling dated 16 June 2002, the Ministry of Finance stated that if a duly established credit card company has overdue loans or outstanding receivables from credit card business that meet the criteria set out in Articles 10 and 11 of the Regulations Governing Banks’ Appropriation of Provision for Asset Assessment Loss and Treatment of Overdue Loans, Outstanding Re-ceivables and Bad Debts, and such receivables are written off as bad debt by a resolution of the board of directors, or at the direction of the fi-nancial regulatory authorities or of a financial audit organization, then when the credit card company files its corporate income tax return, it may treat such amounts as realized losses in ac-cordance with Article 49 Paragraph 5 Item 1 of the Income Tax Law. However, if receivables written off in this way are later collected, the amount collected should be declared as revenue for the year of collection, and is taxable.