Taiwan’s Ministry of Finance has released a notice offering guidance on how to handle accrued expenses that surpass the statute of limitations for unpaid claims 27 November 2024.

The National Taxation Bureau of Taipei, Ministry of Finance, stated that in accordance with Paragraph 2 of Article 24 of the Income Tax Act and Article 108-2 of the Guidelines for Examination of Profit-Seeking Enterprise Income Tax, profit-seeking enterprises that have unpaid accounts payable, expenses, losses, or other types of debts that have exceeded the statute of limitations for claims and remain unpaid shall reclassify these amounts as other income in the year the statute of limitations expires. Upon actual payment, these amounts should then be recorded as non-operating expenses.

The Bureau further explained that, as prescribed in Articles 125 to 127 of the Civil Code, the statute of limitations for the expiration of claims is categorised into three periods: two years, five years, and 15 years. If the claim is for periodic payments of interest, dividends, rentals, maintenance, pensions, or other periodical prestations falling due at regular intervals of one year or less, each successive payment of the claim is extinguished by prescription if it is not exercised within five years.

Therefore, if the amount payable by a profit-seeking enterprise remains unpaid within the timeframe stipulated by the Civil Code, that claim is deemed extinguished in accordance with the Civil Code and the profit-seeking enterprise shall reclassify the unpaid amount as other income.

The Bureau provides the following example: When auditing Company A’s profit-seeking enterprise income tax return for the year 2022, the authority discovered that the company has recorded TWD 7,000,000 interest payable, which had been overdue for more than five years, in its account. The claim for this amount is therefore extinguished by prescription since it is not exercised within five years as prescribed in Article 126 of the Civil Code. Consequently, in accordance with the abovementioned Income Tax Act and Guidelines for Examination of Profit-Seeking Enterprise Income Tax, the amount of aforementioned payable interest shall be reclassified as other income. Should Company A make payment of the accrued interest in the future, the amount can be recorded as non-operating expense.

The Bureau urged profit-seeking enterprises to review their unpaid accounts payable, expenses, losses, and other types of debts to determine whether any payable should be reclassified as other income due to exceeding the statute of limitations for claims when preparing their profit-seeking enterprise income tax returns. Failure to comply with these regulations may result in adjustments and the imposition of additional taxes.