The unrealized interest compensation of convertible bonds can't be recognized as taxable expenses
The National Taxation Bureau of Northern Area (NTBNA), M.O.F. indicated that in accordance with the Regulation Governing Assessment of Profit-seeking Enterprise Income Tax, unrealized expenses and losses are not recognized except those which have been regulated in the Income Tax Act, the aforementioned regulation, and other laws or those approved by projects of the M.O.F.
The NTBNA indicated that company A was found declaring interest expenses which included convertible bond interest compensation amounting to 40 million NTD when NTBNA reviewed its Profit-seeking Enterprise Annual Income Tax declaration of 2015.The interest expenses of company A were adjusted by NTBNA, and the company shall compensate for tax amounting to 7 million NTD.The NTBNA further explained that when a company issues convertible bonds, investors will be granted the right to convert the bonds into stocks. In addition to paying principal and coupon interest, the company shall also give interest compensation to its investors when investors exercise the put option or the company redeems the bonds. However, the interest compensation recognized by the effective interest rate during the period from the date of issue to expiration of the put option is classified as an unrealized expense, which is not allowed to be recognized as taxable expenses.
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