The reason for a company to reduce capital will affect whether the investment company can recognize the investment losses. If the reason is for compensating cumulative losses, the investment company can recognize the investment losses. If it is for capital reduction by cash, the investment company cannot report the investment losses.
National Taxation Bureau of the Southern Area, Ministry of Finance (Taiwan) expresses that there are two main reasons as follows for companies to reduce capital:
1. Capital Reduction for Compensating Cumulative Losses
When a company loses money year after year, the company can reduce capital for compensating cumulative losses, so that the share capital can be written off to eliminate cumulative losses and to enhance the net asset value of each share. In this case, as long as the investment company can provide certified documents of capital reduction of the investee, the investment losses can be reported. In addition, the investment company can calculate with face value the stock dividends previously received from the capital-reduced company into the actual investment costs. And, after multiplying the result by the capital reduction ratio, it can be reported together with investment losses.
2. Capital Reduction by Cash
The reason a company adopts capital reduction by cash is usually due to a period of operation, after an assessment of sufficient funds, which has exceeded its required range, in order to avoid idle funds for waste, the company will reduce capital and refund cash to shareholders. Therefore, the cash reduction by cash for shareholders is only the return of the amount of investment. There is no investment loss. As a result, the investment company cannot report investment losses. The returned share funds in fact should be treated as the recovery of investment costs. The decrease of number of shares should be noted and the cost per share recalculated.
The Bureau explains further that according to Article 99 of the Regulations Governing Assessment of Profit-seeking Enterprise Income Tax, investment losses should be limited to realized ones. If losses arise to an investee but the original capital has not been reduced, the losses cannot be claimed as investment losses. In other words, when the investee reduces capital, it must be for compensating cumulative losses, so that it can report the investment losses.
Under the prevailing trend of capital reduction, investment companies need to understand the reasons for capital reduction. If your capital reduction is not for compensating cumulative losses, please do not report the investment losses, in order to avoid tax penalties. For relevant questions of business registration such as capital increase and reduction, please consult with professional accountants at HWG.
