The Regulations are enacted pursuant to the provisions set out in Paragraph 3, Article 43-2 and Paragraph 5, Article 80 of the Income Tax Act (hereinafter referred to as the "ITA").

(Scope)
The excess interest expenditure on the debts owed directly or indirectly by a profit-seeking enterprise to a related party shall not be considered as expenses or losses if the proportion of related party debt to equity of a profit-seeking enterprise exceeds the specified ratio that is stipulated by the Regulations.
When filing profit-seeking enterprise income tax return, the profit-seeking enterprise shall calculate excess interest expenditure as prescribed in the preceding paragraph in accordance with the Regulations. The Regulations shall also apply when the tax collection authorities conduct investigations and assessments of such cases.

(Definition of Related Parties)
The term "Related Parties" referred to in the Regulations shall include "Affiliated Enterprises" and “Related Parties other than Affiliated Enterprises”.
The “Affiliated Enterprises” as referred to in the preceding paragraph means a profit-seeking enterprise has an affiliated relationship with, or is owned or controlled by other domestic or foreign profit-seeking enterprises as follows:
1. A profit-seeking enterprise directly or indirectly holds 20% or more of the total outstanding voting shares or capital stock in another profit-seeking enterprise;
2. 20% or more of the total outstanding voting shares or capital stock in a profit-seeking enterprise and another profit-seeking enterprise are directly or indirectly owned or controlled by the same person;
3. A profit-seeking enterprise holds the highest percentage of the total outstanding voting shares or capital stock in another profit-seeking enterprise and such percentage is 10% or more;
4. One half or more of the executive shareholders or directors of a profit-seeking enterprise and those of another profit-seeking enterprise are the same;
5. The aggregate number of directors appointed by one profit-seeking enterprise and by the other enterprise(s) in which it directly or indirectly holds 50% or more of the total outstanding voting shares or capital stock, reaches one half or more of the total number of directors of another profit-seeking enterprise;
6. The chairman, general manager or its equivalent or superior of one profit-seeking enterprise is that of another profit-seeking enterprise, or has the relation of a spouse or blood relation within the second degree with that of another profit-seeking enterprise;
7. In the case where the head office of a profit-seeking enterprise is located outside the territory of the Republic of China (hereinafter referred to as the "ROC"), its branch office within the territory of the ROC and its head office or branch offices outside the territory of the ROC are related parties. In the case where the head office of a profit-seeking enterprise is within the territory of the ROC, the head office or branch office within the territory of the ROC and its branch offices outside the territory of the ROC are related parties;
8. A profit-seeking enterprise directly or indirectly controls the personnel, finance, or business operation of another profit-seeking enterprise, including situations where:
(1)The enterprise appoints the general manager or its equivalent or superior of another profit-seeking enterprise;
(2)The enterprise that is not a financial institution lends money or guarantees the loans to another profit-seeking enterprise to an amount representing 1/3 or more of its total assets;
(3)The profit-seeking enterprise cannot commence its production and business activities without the provision by another profit-seeking enterprise of patent, trademark, copyright, secret formula, proprietary technology or any franchises,in which the underlined sales of such production and business activities account for 50% or more of the total sales of the former profit-seeking enterprise in the same year;
(4)The price and terms of the profit-seeking enterprise's purchase of raw materials, components and goods are controlled by another profit-seeking enterprise; and the underlined purchase of such raw materials and goods accounts for 50% or more of the total purchase of raw materials and goods of the former profit-seeking enterprise in the same year;
(5)The sales of products of the profit-seeking enterprise are controlled by another profit-seeking enterprise, and the underlined sales of such products account for 50% or more of the total sales of the former profit-seeking enterprise.
9. A profit-seeking enterprise and another profit-seeking enterprise have entered into a joint venture agreement, or an agreement to conduct business jointly;
10. Other circumstances whereby a profit-seeking enterprise has control or major influence over the personnel, finance, business operation or management decisions of another profit-seeking enterprise.
In the event that the relationship between two profit-seeking enterprises, due to special market or economic conditions, satisfies the criteria prescribed in Items 3 to 5, Subparagraph 8, in the preceding paragraph hereinabove, and nevertheless do not have de facto controlling or subordination relationships, except where the relationship between or among a profit-seeking enterprise and government-owned enterprises, sales agents, distributors or monopolistic enterprises subject to Article 5 of the Fair Trade Act may be deemed as without having a subordinate or control relationship with respect to each other, the profit-seeking enterprise may, prior to filing its annual income tax returns, produce sufficient evidentiary documents to the tax collection authorities for ratification. Once the documents provided have been ratified, the affiliated relationship set forth in the preceding paragraph shall not apply.
The “Related Parties other than Affiliated Enterprises” as referred to in the first paragraph means a profit-seeking enterprise has an affiliated relationship with other local or foreign individuals, profit-seeking enterprises, educational, cultural, public welfare, charity organizations or institutions as follows:
1. A profit-seeking enterprise and a foundation receiving the donation from the enterprise in the amount representing 1/3 or more of the total funds of such foundation;
2. A profit-seeking enterprise and its directors, supervisors, general manager or its equivalent or superior, vice-general managers, assistant general managers and department heads under the direct supervision of the general manager;
3. A profit-seeking enterprise and the spouses of its directors, supervisors, general manger or its equivalent or superior;
4. A profit-seeking enterprise and the relatives of its chairman of the board, or general manager or its equivalent and superior within the second degree of blood relation;
5. A profit-seeking enterprise and the persons who evidentially have the power of control over the enterprise or have the ability to exert major influence over the personnel, financial, business operation or management policy of the enterprise.

(The Scope of Related Party Debts and Owner's Equity)
The term "Related Party Debt" mentioned in the Regulations means the capital granted directly or indirectly by a related party that such capital should be repaid in principal and pay interest, or other compensations with the nature of an interest payment. Such forms of capital include the following:
1. Loans provided directly by the related parties.
2. Loans provided by the unrelated parties with the surety, backing or any other form of security of the related parties.
3. Loans provided by the unrelated parties and such loans are guaranteed as being jointly and severally liable for reimbursement by the related parties. However, if such loans are regarded as the debts owed by a profit-seeking enterprise to the related parties in accordance with Paragraph 1 of Article 6, they shall be excluded.
4. Other forms of capital financing with the nature of liability acquired directly from the related parties or indirectly from the unrelated parties with the surety, backing or any other form of security of the related parties.
The related party debts prescribed in the preceding paragraph exclude the following:
1. In the case that a profit-seeking enterprise meets any one of the following requirements, its related party debts shall be exempted:
(1) The net operating revenue plus the net non-operating revenue of the income tax return for the current year is below the standard as prescribed by the Ministry of Finance (hereinafter referred to as the "MOF").
(2) Both the interest expenditure filed in the income tax return of the current year and the amount of the related party interest expenditure in the current year mentioned in Article 5 are below the standard as prescribed by the MOF.
(3) The taxable income of the current year before deducting the interest expenditure is negative and such losses could not apply the deduction prescribed in the proviso of the Paragraph 1, Article 39 of the ITA.
2. Where the interest is reclassified as a capital expenditure in accordance with Subparagraph 7 or Subparagraph 8 of Article 97 of the “Guidelines for Examination of Profit-Seeking Enterprise Income Tax,” the loans of such interest shall be exempted.
3. Where the interest is reclassified as a capital expenditure or deferred expense in accordance with Subparagraph 9 of Article 97 of the “Guidelines for Examination of Profit-Seeking Enterprise Income Tax,” the loans of such interest shall be exempted.
4. Other debts as approved by the MOF.
The term "Owner’s Equity" mentioned in the Regulations for a profit-seeking enterprise having its head office within the territory of the ROC means the net amount of owner’s equity in its balance sheet. However, if the net amount of the owner’s equity in its balance sheet is less than the sum of the paid-in capital and the capital reserve derived from the issuance of new shares at a premium in accordance with Subparagraph 4 of Article 30 of the “Guidelines for Examination of Profit-Seeking Enterprise Income Tax,” the owner’s equity shall be equal to the sum of the paid-in capital and such capital reserve. The owner’s equity mentioned in the Regulations for a profit-seeking enterprise having its head office outside the territory of the ROC with a branch office within the territory of the ROC means the actual paid-in working capital on which no interest is bound to be paid.

(The Calculation of Interest Expenditure that Shall Not be Considered as Expenses or Losses)
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

(The Principles of Disposal of a Transfer Pricing Adjustment)
Where a profit-seeking enterprise acquired capital directly or indirectly from the related party and both agreed to exempt payment of interest or other compensations with the nature of interest payment, such capital shall be excluded from the related party debt. In the event that the tax collection authorities have conducted an investigation pursuant to the “Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s Length Transfer Pricing” (hereinafter referred to as the "TP Regulations"), and the arm’s-length adjustments have been made to increase the related party’s interest revenue or other revenue with the nature of interest, and at the same time, a corresponding adjustment has been made in the profit-seeking enterprise’s interest expenditure or other expenses with the nature of interest, such capital shall be deemed as related party debt and shall be added to the numerator of the formula regulated in Paragraph 3 of the previous Article, and its interest shall be added to the sum of interest expenditure that shall not be considered as expenses or losses as regulated in Paragraph 1 of the previous Article. When filing its profit-seeking enterprise income tax return, the profit-seeking enterprise and its related parties making an adjustment in accordance with regular business practice pursuant to the TP Regulations shall also apply previous practice.
Where the interest expenditure of the related party’s debts has been adjusted in accordance with regular business practice pursuant to the TP Regulations, the adjusted interest expenditure shall be added to the sum of interest expenditure that shall not be considered as expenses or losses regulated in Paragraph 1 of the previous Article. When filing its profit-seeking enterprise income tax return, the profit-seeking enterprise and its related parties making an adjustment in accordance with regular business practice pursuant to the TP Regulations shall also apply previous practice.

(Information and Documentation to Be Provided upon Tax Filing)
Where the profit-seeking enterprise conducts controlled transactions of the type of use of funds with its related parties, it shall disclose the information regarding the associated enterprises or related parties in line with Article 21 of the TP Regulations when filing its income tax return. The capital regarded as related party debt depicted in Paragraph 1, Article 4 of the Regulations shall, except for the exemption when conforming to any one of the conditions provided in the items in Subparagraph 1, Paragraph 2, Article 4 of the Regulations, based on the prescribed format, disclose the proportion of related party debt to equity and relevant information, and prepare and retain the documentations required in Paragraph 2 for examination and verification by the tax collection authorities.
The documentations that shall be prepared and retained mentioned in the preceding paragraph are as follows:
1. The explanation of the changes in circumstances of the profit-seeking enterprise’s paid-in capital, capital reserve, retained earnings (or accumulated losses) and other items under owner’s equity.
2. The nature of the liabilities, purposes of the liabilities and market situation at the time of the acquisition of the liabilities.
3. The types of currency, amount, interest rate, period and financing condition of the liabilities, and the computation criteria of exchange rate.
4. Pledges and conditions offered by a profit-seeking enterprise.
5. Guarantors and guarantee conditions.
6. The trends of loan interest rate and financing conditions under the same period and similar loans.
7. The conversion conditions of the convertible corporate bonds.
8. Other information regarding the related parties, liabilities and owner’s equity that could impact the calculation of the excess interest expenditure that shall not be considered as expenses or losses.
Where a profit-seeking enterprise fails to disclose and prepare the relevant documentations of the liability and owner equity according to the preceding paragraph, the tax collection authorities may determine the proportion of related party debt to equity of a profit-seeking enterprise based on the available taxation data.

(Enforcement Date)
The Regulations shall enter into force from the filing of the profit-seeking enterprise income tax return of the year 2011.