According to the National Taxation Bureau of Taipei, Ministry of Finance, if the ratio of related party debt to equity for a profit-seeking enterprise exceeds the prescribed threshold, the excess interest expenses shall not be claimed as expenses or losses, and when filing the profit-seeking enterprise income tax return, the ratio of related party debt to equity and relevant information shall be disclosed in its annual income tax return.
The Bureau further explains that, in order to avoid the possibility of a profit-seeking enterprise using a large number of loans from related parties in lieu of capital contribution, which would weaken the capital and affect the fairness of the tax system, pursuant to Article 43-2 of the Income Tax Act and the "Regulations Governing Assessment of Interest Expenditure on the Debts Owed by a Profit-seeking Enterprise to a Related Party in Accordance with the Condition that the Related Payments Shall Not be Considered as Expenses or Losses," if the ratio of related party debt to equity exceeds the prescribed 3-to-1 ratio, the excess interest expense shall not be claimed as expense or loss. The so-called "ratio of related party debt to equity" is calculated based on "the sum of the monthly average amount of each related party's debt in the current year divided by the sum of the monthly average amount of owners' equity in the current year."
For example, Company A records an interest expense of NT$9 million to related parties in 2023, the sum of the monthly average amount of each related party's debt in that year is NT$360 million, and the sum of the monthly average amount of owners' equity is NT$60 million. The ratio of related party debt of NT$360 million to the owners’ equity of NT$60 million is 6:1, and the interest expense in excess of the aforementioned 3 to 1 ratio is NT$4.5 million [calculation formula = the interest expense to related parties in the current year of NT$9 million x (1-3/6)]. Company A should reduce its interest expense by NT$4.5 million when filing its 2023 profit-seeking enterprise income tax return, report it in page B1 of the tax return and disclose the relevant information in accordance with the regulations.
The Bureau calls on profit-seeking enterprises having interest expenses to related parties to calculate the amount of claimable interest expenses correctly in accordance with the relevant provisions of the aforementioned tax laws and make adjustments in accordance with the law when filing the tax return, so as not to be subject to the adjustment for tax deficiency and incurring interest for incorrect filing.
(Contact person: Revenue Assessor Xu of Profit-Seeking Enterprise Income Tax Division; Tel: 2311-3711 ext. 1211)