Prohibited Expenses under Revenue Code : Loan from Director/ Shareholder

Prohibited Expenses under Revenue Code : Loan from Director/ Shareholder

Normally, when a company is established, it may have its registered share in a high amount. But, when the company calls for the payment of shares, only partial payment is made, which is possible because the Civil and Commercial Code only prescribes that the paid-up capital shall not be less than 25 percent. The consequence is that when such company has operated its business and has losses whereas it has not called for additional payments of registered shares, but procures loans from its shareholders and pays the loan interest to shareholders who have not yet made full payments for their shares. Once the Revenue Department examines and finds out this case, the officer may claim that this cannot be done. The interest expense paid to the company’s shareholders who are not due to registered shares is the prohibited expense I accordance with Section 65 tri (13) of the Revenue Code consisting of the expense not paid for profit seeking or especially for business since the company is able to call the shareholders to make the payment of due share capital, which makes the company have the working capital without any costs. After that the Revenue Department shall force the company to assess its increase of income for more tax payments. So, what will you do?

Take it easy, in this regard, the Revenue department has a guideline that in case the company losses its working capital and procures loans from the company’s director or shareholder with due payment of share capital for the business operation of the company; if the company is able to prove that such loans are actually employed for its business operation, the interest uncured shall not be counted as the prohibited expense according to Section 65 tri (13) of the revenue Code and the company can utilize it to deduct its interest expense.

(The Revenue departmen’s ruling no. Gor Kor 0706/7680 dated September 13, 2005)

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