Key Takeaways
- Unpaid accrued expenses and other liabilities may need to be reclassified as other income when the creditor’s claim expires under Taiwan’s statute of limitations.
- The applicable limitation period depends on the nature of the claim under Taiwan’s Civil Code.
- Businesses that fail to make the required tax adjustment may face additional corporate income tax assessments during tax audits.
- Regular review of aging liabilities is important for Taiwan corporate income tax compliance.
- Foreign-invested enterprises should pay particular attention to long-outstanding intercompany balances and accrued expenses.
What Does Taiwan Tax Law Require?
Under Taiwan corporate income tax regulations, businesses must review whether long-outstanding liabilities remain legally enforceable.
According to Article 24 of the Income Tax Act and Article 108-2 of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax, unpaid accounts payable, accrued expenses, losses, and other liabilities must be reclassified as other income when the creditor’s right to claim payment has expired and the liability remains unpaid.
Basic Rule
Situation | Tax Treatment |
Liability remains payable and within limitation period | Continue accounting treatment |
Creditor’s claim expires and payment has not been made | Reclassify as other income |
Liability is paid after reclassification | Recognize as non-operating expense in payment year |
The key factor is not whether the liability remains recorded in the accounting books, but whether the creditor still has a legally enforceable right to demand payment.
Why Must Unpaid Liabilities Be Reclassified as Other Income?
The purpose of this rule is to ensure that taxable income reflects the company’s actual legal obligations.
If a liability remains on the balance sheet indefinitely after the creditor can no longer legally enforce payment, the company may continue reducing taxable income without a corresponding enforceable obligation.
Main Reasons Behind the Rule:
- Align tax reporting with legal enforceability
- Prevent indefinite tax deferral
- Improve accuracy of taxable income calculation
- Encourage companies to regularly review aging liabilities
Which Liabilities Are Most Commonly Affected?
Certain types of liabilities are more likely to remain outstanding for extended periods.
Common Examples
Liability Type | Examples |
Interest payable | Loan interest, financing costs |
Service fees | Consulting fees, professional fees |
Rental expenses | Office or equipment rental |
Employee-related payments | Severance, employee benefits |
Management fees | Related-party service charges |
Royalties | Intellectual property payments |
Intercompany balances | Cross-border transactions |
Practical Insight
Foreign-invested companies should pay special attention to intercompany balances because these amounts may remain unpaid for commercial or administrative reasons. Long-outstanding balances should be reviewed to determine whether tax adjustments are required.
How Does the Statute of Limitations Work in Taiwan?
Taiwan’s Civil Code provides different limitation periods depending on the nature of the claim.
Common Limitation Periods
Limitation Period | Examples |
2 years | Certain specific claims |
5 years | Interest, dividends, rent, recurring payments |
15 years | Certain general claims |
For many recurring payment obligations, including interest, rent, dividends, alimony, severance payments, and other periodic payments due within one year or less, the claim generally expires after five years if the creditor does not exercise the right to claim payment.
Quick Reminder
The applicable period depends on the nature of the liability. Companies should not assume that all unpaid balances automatically follow the same limitation period.
Example: Unpaid Interest Expense
The National Taxation Bureau of Taipei (NTBT) provided the following example:
A company reported NTD 9 million of accrued interest payable in its 2023 corporate income tax return.
Details:
- Payment due date: February 2018
- Amount unpaid: NTD 9 million
- Review year: 2023
Because the five-year limitation period had expired, the tax authority required the company to:
- Reclassify NTD 9 million as other income
- Adjust taxable income accordingly
- Pay additional corporate income tax of NTD 1.8 million
If the company later pays the interest, the payment may be recognized as a non-operating expense in that payment year.
What Are the Tax Risks for Businesses?
Companies may face tax adjustments if long-outstanding liabilities are not properly reviewed.
Potential Risks
- Additional corporate income tax assessment
- Tax audit adjustments
- Interest on underpaid tax
- Compliance issues
- Additional documentation requirements
Businesses Are More Likely to Face Risks When They:
- Maintain unpaid liabilities for many years
- Do not review accounts payable aging reports
- Lack supporting contracts or payment records
- Fail to evaluate limitation periods
How Can Businesses Reduce Tax Risks?
Businesses can reduce potential tax exposure through a structured review process.
Step 1: Review Aging Liabilities
Identify long-outstanding balances, including:
- Accounts payable
- Accrued expenses
- Interest payable
- Intercompany balances
Step 2: Determine the Applicable Limitation Period
Evaluate:
- Nature of the claim
- Applicable Civil Code rules
- Expiration date of creditor’s rights
Step 3: Assess Tax Treatment
Determine whether:
- Liability should remain recorded
- Reclassification as other income is required
- Future payment treatment should be considered
Step 4: Maintain Supporting Documentation
Keep:
- Contracts
- Invoices
- Payment records
- Communication records
Step 5: Seek Professional Advice When Needed
Professional review may help businesses avoid unexpected tax adjustments, especially for complex transactions.
What Should Foreign Investors Know About Taiwan Tax Compliance?
Foreign companies operating in Taiwan should understand that local tax rules apply to both domestic and foreign-invested enterprises.
Areas Requiring Attention
- Intercompany financing
- Management fees
- Royalty payments
- Cross-border service arrangements
- Long-outstanding related-party balances
Practical Tips
Businesses should establish regular communication between:
- Finance teams
- Accounting teams
- Legal teams
- Tax advisors
This helps identify potential tax issues before annual corporate income tax filing.
Conclusion
Long-outstanding unpaid liabilities may create unexpected corporate income tax risks in Taiwan. Once a creditor’s legal right to claim payment expires, businesses may be required to reclassify the unpaid amount as other income, even if the liability remains recorded in accounting records.
By regularly reviewing aging liabilities, monitoring limitation periods, and maintaining proper documentation, businesses can reduce tax risks and improve compliance with Taiwan corporate income tax regulations.
