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On 22 June 2011, the Ministry of Finance (MOF) was authorized by Paragraph 3 Article 43-2 of the Income Tax Act to announce the "Regula-tions Governing Companies' Declaration of in-terest owed to related parties as Expenses or Losses (the "Regulations")". According to the Regulations, starting from 2011, interest owed to related parties and exceeding a certain ratio cannot be declared as expenses or losses. The major provisions of the Regulations are:
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The ratio of debt owed to related parties to equity cannot exceed 3:1. No interest pay-ment exceeding that ratio can be declared as expenses or losses.
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The Regulations defines the debts owed to related parties and equity that can be recog-nized. In order to simplify the administrative procedure, the MOF issued a tax ruling dated 26 September in 2011 (Ref. No. 10000367210) defines the debts may not be recognized the debts owed to related parties, which are as follows:
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(1) |
The aggregate amount of the net revenue and non-operating income is less than NT$30,000,000.
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(2) |
Interest declared in the current year and interest owed to related parties is both less than NT$4,000,000.
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(3) |
Taxable income without deduction of in-terest that is negative and taxable loss that is not eligible for Article 39 of the Income Tax Act.
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(4) |
Interest on the debts that should be booked as assets under Item 7 or Item 8, Article 97 of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax.
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(5) |
Interest on the debts that should be booked as assets/deferred expenses under Item 9, Article 97 of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax.
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(6) |
Debts borrowed from non-related parties and guaranteed by the profit-seeking en-terprise itself, where the financial institu-tions have requested that the related par-ties be joint guarantors.
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When filing a tax return, a profit-seeking en-terprise should state its related party debt-to-equity ratio and relevant information in the prescribed form, and should keep rele-vant receipts. In order to moderate profit-seeking enterprises' burden of disclo-sure, the Regulations also defines the information that is exempt from disclosure.
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In summary, when filing the 2011 income tax return, a profit-seeking enterprise should follow the Regulations to disclose the related party debt-to-equity ratio and relevant information. If the related party debt-to-equity ratio exceeds 3:1, such debt should not be declared as expenses or losses.
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