Tax Treatment of DES for debtor
Debt-Equity-Swap (DES) is a method of exchanging debt for equity. In practice, DES is used as one of the methods to restructure debtor’s finances when it has excessive debt.
Foreign subsidiaries in Japan often consider using DES in a case where they owe to their parent companies the large debt.
It should be noted that the increase in capital and capital surplus by DES, a form of in-kind contribution, shall be measured at the market value of credit for debtor’s taxation purpose of DES.
Therefore, under the Corporate Tax Act, capital and capital surplus shall be evaluated by the market value of canceled debt. Moreover, the difference between the face value and the market value
shall be included in taxable income as gain from forgiveness of debt.
Ex) A subsidiary carried out DES canceling its loan from its parent company (face value JPY200millions) and issued new shares. The market value of the loan is JPY10millions.
(Dr) Loan 200M (Cr) Paid-in-capital 10M
Gain from forgiveness of debt 190M
Capital and capital surplus shall be increased by the market value of canceled debt in accounting since the increase in capital and capital surplus shall be measured at the monetary contribution amount and the current price of in-kind contribution, according to the Companies Act.
No topics in this issue for accounting.
３. This Week’s Words of Wisdom (Source: “English words of wisdom to enrich life”)
“The worst thing is that we cannot make a decision.” (Napoleon Bonaparte)
No one would deny that Napoleon is one of the worldwide heroes in the early 19th century. He enacted the Civil Law called “The Napoleonic code”, adopted the metric system, invented canned and bottled foods, enforced the right-hand traffic and founded the Legion d’Honneur, which is all familiar with us.
After all, it is his action that made him a hero, I suppose. In the sense, this saying is supported by his action.