Tax Treatment of Debts Forgiven under MinLaw’s Simplified Debt Restructuring Programme
The Ministry of Law (“MinLaw”) has established a Simplified Insolvency Programme
(“SIP”) to assist micro and small companies (“MSCs”)1 that require support to restructure their debts to rehabilitate the
business, or wind up the company as the business has ceased to be viable.
The SIP will
provide simpler, faster, and lower cost proceedings for eligible MSCs to
restructure their debts or wind up the company in an orderly manner. This will
be done through two temporary and new processes adapted and modified from the
existing framework in the Insolvency,
Restructuring and Dissolution Act 2018 (“IRDA”):
Simplified Winding Up Programme (“SWUP”): Orderly liquidation and dissolution of non-viable businesses;
Simplified Debt Restructuring Programme (“SDRP”): Restructuring of debts and potential rehabilitation of viable businesses.
To qualify for the SIP, the MSCs must meet
certain specified eligibility criteria. The eligibility criteria will include
amongst others, limits on the total liabilities of the company, the number of
creditors and employees, and the value of realisable assets in winding up
(applicable only to SWUP).
For more information on the eligibility criteria and application process
for SWUP and SDRP, companies can refer to MinLaw's website.
MinLaw’s SDRP
is intended to assist viable businesses to restructure their debts and
potentially rehabilitate, particularly given the unprecedented effect of the COVID-19
pandemic. The SDRP adapts and simplifies the existing pre-packaged scheme of
arrangement regime in the IRDA. While various aspects will be addressed in the
debt restructuring scheme, it is envisaged that forgiveness of debt and
extension of time for repayment, will feature heavily. It is expected that the
debts of such MSCs will be largely made up of loans from banks (including under
ESG’s COVID-19 loan programme), and trade debts.
Taking into consideration
the purpose of the SDRP, debts forgiven (including trade debts and loans) under
the SDRP will be regarded as capital in nature and hence not subject to income
tax.