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RECOGNITION OF LOSS FROM INVESTMENT IN MISMANAGED FINANCIAL INSTITUTION
Josephine Peng/Rita Li
According to the Tax Return Auditing Rules, a profit-seeking enterprise should not recognize any loss from investment, unless the invested company reduces its capital or is liquidated. However, if a profit-seeking enterprise invests in a financial institution that has been mismanaged, according to a ruling issued by the Ministry of Finance dated August 8, 2008, said enterprise may recognize loss from said investment if the following requirements are met:
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The mismanaged financial institution is taken over by the Central Deposit Insurance Corporation, as appointed by the Ministry of Finance or the Financial Supervisory Commission; and
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The Central Deposit Insurance Corporation has put the mismanaged financial institution out to bid and has completed the procedure for general assumption.
With respect to the timing of recognizing loss, the ruling states as follows:
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A profit-seeking enterprise may recognize the loss in the fiscal year in which the record date of the general assumption falls; provided that, a certificate stating the number of shares and the net value per share (based on the latest financial statements before the record date of the general assumption, and further audited and verified by a certified public accountant) has been issued by a stock agency appointed by the Central Deposit Insurance Corporation.
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For the loss incurred by a profit-seeking enterprise in a year (i) before fiscal year 2008, and (ii) on which tax assessment has not yet been made by the tax authorities, the profit-seeking enterprise may file an application along with the above-mentioned certificate with the local tax authorities for making corrections to tax return.
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If the profit-seeking enterprise subsequently receives any of the residual assets of the mismanaged financial institution after it is dissolved, it should recognize residual assets received as other income in the fiscal year of such receipt and pay income tax thereon in due course.
