Newsletter
TAX BREAKS FOR BANK DEBT REPAYMENTS
The Corporate Mergers and Acquisitions Law (CMAL) contains a rather unusual tax conces-sion: Article 37 Paragraph 3 provides that if a profitable company acquires a loss-making company, and at the same time repays accumu-lated bank debt transferred to it with the loss-making company, then if the acquired assets or business generate any profit, it can enjoy exemption from corporate income tax. Article 37 Paragraph 4 makes the same exemption available in the case of a merger between two loss-making companies.
On 13 January 2003, the Executive Yuan issued the Regulations Governing Corporate Income Tax Exemption after Repayment of Bank Debt upon Corporate Merger or Acquisition. The main content is as follows:
Ÿ "Loss-making company" means a company that has accumulated losses at the record date of the merger or acquisition; any other com-pany is defined as a profitable company. "Accumulated bank debt" means monies borrowed from a bank of which payment was overdue at the merger or acquisition record date, as confirmed by certification provided by the creditor bank.
Ÿ Up to the amount of debt repaid, income gen-erated from the acquired assets or business can be exempted from income tax over the five years following the merger or acquisition. For instance, if a loss-making company is acquired in 2003, and NT$100 million is repaid on its behalf, then any taxable earnings generated by the acquired assets or business during the next five years can be exempted from income tax, up to a cumulative allowance of NT$100 mil-lion.
Ÿ The acquired business or assets should be re-corded under separate accounting books for calculating the amount of income exempt from tax, and related losses and expenses must be reasonably apportioned. If establishing separate accounting books presents difficulties, the company may have its tax auditor states the reasons and presents a reasonable formula for computation for approval by the Ministry of Finance.
Ÿ A company that qualifies for the tax exemp-tion need not apply for prior approval. Instead, when filing its annual tax return, the company should append the merger or acquisition agreement or plan, documents and statements showing the required status as a profitable company and a loss-making company, and supporting documents from the creditor bank.
Ÿ The regulations are effective from 8 February 2002 to 7 February 2007.
However, because the wording of the regula-tions is relatively simple and concise, it is uncertain whether the tax collection authori-ties may apply some discretion in excluding eligibility based on the wording of the CMAL. For instance, for accumulated bank debt to be regarded as having been "transferred with" the acquired company, does the name of the debtor need to change? Also, under Article 4 of the CMAL, "mergers and acquisitions" in-clude three different scenarios, i.e. merger, acquisition, and demerger. Acquisition means acquiring the shares, business or assets of an-other company in exchange for shares, cash or other assets, in accordance with the relevant laws and regulations. Thus is purchase of as-sets one of the forms of acquisition defined by the CMAL? Is tax exemption applicable un-der such circumstances? How is it to be ap-plied? Are there any other special circum-stances that exclude eligibility? It is difficult to estimate at this early stage of the regula-tions' implementation, and what attitude the tax authorities will take with regard to these questions.
Companies planning to repay bank debt at the time of a merger or acquisition should closely watch the development of the tax authorities' interpretation of the law. In order to take ad-vantage of the tax incentive, companies under-taking merger or acquisition should ensure that they obtain all the required documents, including the merger or acquisition agreement or plan, fi-nancial statements at the merger or acquisition record date (to establish the status of the two companies as a profitable company and a loss-making company), and the relevant certifi-cations from creditor banks.