Abstract: The enterprise income tax rules for debt cancellation are an important safeguard for the rule of law in the business environment. The rules comprise a general rule for enterprises operating normally and a special rule for those undergoing bankruptcy reorganization. The necessity for a special rule arises from the institutional value of bankruptcy reorganization and the limited ability of debtors to pay taxes. However, this does not justify adopting “tax relief” or “income exclusion” as the content of this special rule. Given the risks of fraudulent debt cancellations and fraudulent reorganizations, the design of the special rule must be guided by the ability-to-pay principle, uphold the principle of tax neutrality, and follow a market-oriented approach. It should adopt a moderate stance: providing enterprises with sufficient time to recover without offering excessive preferential treatment that could distort market choices or induce unnecessary bankruptcy reorganizations. Therefore, the proposal in the “Enterprise Bankruptcy Law (Draft Amendment)” to treat debt cancellation as “non-taxable income” is debatable. A viable path for improvement lies in a composite scheme that grants debtors the right to choose among offsetting gains and losses, accelerated depreciation, and tax installment payments.