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Good. Interest on convertible debt is taxable to the debtor at the time it accrues, not when it is ultimately paid
So, in short - yes, interest is taxable on a convertible note even if it is going to ultimately become equity
and even if it is not paid in cash
That is correct
It is taxable when it is accrued
any implication to the company?
If the holder has to claim the interest as income, the company can deduct interest expense
is there a reporting requirement by the company to the IRS?
You will issue a 1099-INT for the amount of interest income paid to the debtor
now comes the hard part... the company was formed in Cyprus. It is an Ltd with Articles of Association in Cyprus. It is not yet a US Inc. Investors are from Russia, Germany and the US.
How does that affect the interest tax liability
if at all
The US investors would have interest income but there's no reporting requirement by the company if the company is not doing business in the US
the company is in startup mode, and we are hoping to retrieve it from the edge of bankruptcy. it has no sales. and expenses have only been mostly for patent prosecution during the past few years.
so it is up to the debt holders in each country to report their accrued interest for each year?
Yes, that is correct. I could not tell you about any other country's liability other than the US
right. thanks. so to summarize... it is up to the individual investors to report their interest income in each jurisdiction. interest income from a convertible note is taxable whether or not it is paid or converted into equity. yes?