The National Taxation Bureau of Taipei, Ministry of Finance, stated that when a debtor is unable to repay a debt and the two parties reach a settlement under which the enterprise waives part of its claim, the resulting uncollectible amount may be reported as a bad debt loss in the year the settlement is approved by the court, provided that the enterprise has obtained a mediation certificate and the settlement has been approved by the court.
The Bureau explained that, under Article 94, Subparagraph 7 of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax, a claim that becomes uncollectible as a result of a settlement may be recognized as a bad debt loss only if the enterprise obtains the relevant supporting documents. For settlements reached through the courts, including pre-bankruptcy court settlements and settlements reached in litigation, a court settlement record or ruling is required. In addition, under Article 27 of the Township and County-Administered City Mediation Act, a mediation settlement reached through a township, city, or district mediation committee and subsequently approved by the court has the same legal effect as a final civil judgment. Therefore, if an enterprise reaches a settlement through a mediation committee and the settlement is subsequently approved by the court, resulting in part or all of a claim becoming uncollectible, the enterprise may treat the resulting loss as a bad debt loss actually incurred.
The Bureau further explained that the year in which the bad debt loss should be reported is the year the court approves the settlement, not the year in which the mediation is reached. If any portion of a previously reported bad debt loss is subsequently recovered, the recovered amount must be reported as other income subject to tax in the year of recovery.
The Bureau gave the following example: Company A sold goods to Company B, generating accounts receivable of NT$10 million. Because Company B was experiencing financial difficulties and was unable to repay the full amount, the two parties reached a settlement through a mediation committee in 2024, under which Company B agreed to repay NT$6 million while the remaining NT$4 million in debt was waived. The mediation committee subsequently submitted the mediation agreement and case file to the competent court for review on December 23, 2024, and the court approved the settlement on January 7, 2025. Since the court approved the settlement in 2025, Company A should report the NT$4 million bad debt loss in 2025, not 2024. However, when Company A filed its 2024 profit-seeking enterprise income tax return, it reported the NT$4 million bad debt loss in that year. As this did not comply with the aforementioned regulations, the Bureau disallowed the deduction and assessed additional tax of NT$800,000 (NT$4 million × 20% tax rate).
The Bureau reminds enterprises that when a bad debt loss arises from a settlement, they should not only prepare the relevant supporting documents but also confirm the year in which the court approved the settlement and report the bad debt loss in the correct year. This will help avoid having the deduction disallowed and additional tax assessed by the tax authority due to reporting the loss in the wrong year.
(Contact: Mr. Liang, Head of Profit-Seeking Enterprise Income Tax Division; Tel: 02-23113711 ext. 1250)