(The Calculation of Interest Expenditure that Shall Not be Considered as Expenses or Losses)
Article 5
Where the proportion of related party debt, owed directly or indirectly by a profit-seeking enterprise to a related party, to equity of a profit-seeking enterprise exceeds the specified standard ratio that is stipulated in Paragraph 3, the profit-seeking enterprise should compute the excess interest expenditure on the debts not to be considered as expenses or losses pursuant to the provisions set out in Article 43-2 of the ITA in accordance with the following formula:
The amount of interest expenditure that shall not be considered as expenses or losses = the sum of the interest expenditures on related party debts in the current year (1-the standard ratio of related party debt to equity / the ratio of related party debt to equity of a profit-seeking enterprise)
The term “the interest expenditures on related party debts in the current year” mentioned in the preceding paragraph means that the interest expenditures shall be recognized and attributed as its costs, expenses or losses of the current year under the accounting system on an accrual basis. Such interest expenditures include any kind of payment on related party debts, whether direct or indirect, as stipulated in Paragraph 1 of the previous Article in the current year, such as the actual paid interest, interest payable, additional point margin interest, penal interest, guarantee fee, collateral fee, loan commitment fee, loan financing fee, syndicated financing fee, and other expenses with the nature of interest payment. It also includes the interest derived from the loans provided by the unrelated parties that are guaranteed as being jointly and severally liable for reimbursement of the loans through the related parties regulated in the proviso of Subparagraph 3, Paragraph 1 of the previous Article, but excludes the interest derived from related party debts regulated in Paragraph 2 of the previous Article.
The standard ratio of related party debt to equity regulated in Paragraph 1 is 3:1. The ratio of related party debt to equity of a profit-seeking enterprise shall be computed according to the following formula：
The ratio of related party debt to equity = the sum of the monthly average amount of each related party’s debt in the current year / the sum of the monthly average amount of owner’s equity in the current year
The monthly average amount of each related party’s debt in the current year = (the book value of each related party’s debt at the beginning of each month + the book value by the end of each month) / 2
The monthly average amount of owner’s equity in the current year = (the book value of the owner’s equity at the beginning of each month + the book value by the end of each month) / 2