Newsletter
INCOME TAX AND BUSINESS TAX ON NPLS
The Ministry of Finance (MOF) has previously issued a number of interpretations on taxation issues associated with the handling of financial institutions’ non-performing loans (NPLs) by asset management companies (AMCs). On 28 September and 12 October 2005, the MOF is-sued two further interpretations to address ques-tions regarding taxation and issuance of uniform invoices when an AMC handles a financial in-stitution’s NPLs comprising blocks of unsecured consumer loans of a single type.
The September 28 interpretation states that the actual transaction price for the purchase by an AMC of an entire block of non-performing un-secured consumer loans of a single type should be the cost of acquisition of the block of loans; it is not necessary to assess the cost of acquisition of each individual loan. From the year in which revenues from the resale, collection, or disposal of NPLs in the block concerned exceed the cost of the block’s acquisition, such revenues should be declared as income in accordance with the Income Tax Act.
With regard to business tax, the October 12 in-terpretation stated that, if an AMC’s income tax returns for the year in which it purchases non-performing unsecured consumer loans of a single type from a financial institution as a single block, and for each year in which interest and principal are recovered on the same NPLs, are audited and certified by a certified public ac-countant, then when the resale price of the entire block of loans or the amounts collected on the loans by the AMC itself exceed the original purchase price of the block, the AMC may make out aggregate monthly uniform invoices for the excess amounts, and declare the amounts for business tax, in accordance with the MOF order dated 17 September 2003. The AMC need not present such invoices to the financial institution selling the NPLs. In respect of interest income collected from debtors during the period in which the AMC holds the NPLs, the AMC should make out special uniform invoices and present these to debtors.