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”):

  1. Simplified Winding Up Programme (“SWUP”): Orderly liquidation and dissolution of non-viable businesses;

  2. 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.

1. Micro and small companies are defined as companies with an annual revenue of less than $1 million and $10 million respectively.