Amendments to Statute for Industrial Innovation has passed third reading at Legislative Yuan

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1 Taiwan Tax Update November 2017 Income Tax Act Amendments to Statute for Industrial Innovation has passed third reading at Legislative Yuan The Legislative Yuan passed its third reading of Amendments to Statute for Industrial Innovation ( Amendments ) on November 3, The salient points of the amendment are as follows: 1. Limited partnerships are now eligible for investment tax credits, double deduction of R&D expenses, and tax deferral on technology shares (i.e. assignment of IP rights in exchange for shares). 2. If certain criteria are met, venture capital limited partnerships may apply to be taxed on a pass through basis, meaning that the limited partnership is not subject to corporate income tax. Instead, the partners are subject to individual income tax or corporate income tax based on the profit distribution ratio and profit allocated to each individual partner. 3. An individual who invests more than TWD 1 million in a start-up that has been established for less than two years and who holds the shares for at least two years, may after the conclusion of the required investment period, deduct up to 50% of the investment amount from taxable individual income. The deductible amount is capped at TWD 3 million per year. 4. For income from share based compensation and income from assignment of intellectual property rights in exchange for shares, it is now taxed using actual transfer price on subsequent share transfer date, which replaces the five-year tax deferral rule used previously. The calculation of income tax is illustrated as follows: PwC Taiwan 1

2 $50 $40 Transfer price $15 Exercise price Share Based Compensation Fair market value at vest or acquisition Income =0 Diff 35 -Salary income -Other income or $50 $40 $15 Transfer price Value of share received Cost (Note) Assignment of IP Rights in Exchange for Shares Income =0 Diff 35 -Royalty income -Property transaction gain Year of share acquisition Year of transfer Year of share acquisition Year of transfer Note: If no supporting documents are provided, the cost is deemed to be 30% of transfer price These amendments are effective from the announcement date until December 31, For tax incentives provided to venture capital limited partnerships (i.e. point 2 above), said rules are applicable to venture capital limited partnerships newly established during the period from the announcement date until December 31, 2019; these rules will apply to income earned within 10 years from the fiscal year the venture capital limited partnership was established. PwC Observation: The newly released regulations have revised the timing of tax deferral and categorization of income type. Entities and individuals can evaluate the tax impact of tax deferral till share acquisition date versus subsequent share transfer date. Before the amendment was passed, for income from share based compensation and income from assignment of intellectual property rights in exchange for shares of listed or OTC companies that have elected to be taxed on a deferral basis, the difference between share price on subsequent share transfer date and exercise price or cost is split into two components: tax deferred income realized on the share acquisition date is taxed as salary income or other income (share based compensation), or property transaction gain or royalties (transfer of intellectual property rights in exchange for shares); whereas, remaining income recognized on PwC Taiwan 2

3 subsequent share transfer date (share transfer price minus fair market value of shares on share acquisition date for share based compensation or fair market value of shares received from transfer of intellectual property rights) is taxed as capital gain from sale of shares. After this amendment is passed, income tax will be levied only once, with taxable income equivalent to share transfer price in the year of transfer minus the exercise price or cost. Based on applicable circumstances, this income can be categorized as salary income or other income (share based compensation) or property transaction gain or royalties (transfer of intellectual property rights in exchange for shares), etc. Such taxation method is the same as that for transfer of intellectual property rights in exchange for non-listed or non-otc shares before this amendment was passed. Following the amendment to the Statute for Industrial Innovation, the Ministry of Economic Affairs in conjunction with the Ministry of Finance and other related ministries will complete amendment of relevant supplementary regulations within six months following the announcement of this amendment. Entities and individuals are encouraged to stay abreast of latest development of relevant amendments and its impact on relevant tax treatment. Announcement of Regulations Governing Calculation of Individual Income from Controlled Foreign Companies The Ministry of Finance announced Regulations Governing Calculation of Individual Income from Controlled Foreign Companies on November 14, Following the president s announcement of the amended Income Basic Tax Act in May 2017, which introduced the Controlled Foreign Company ( CFC ) model for individuals, the Regulations Governing Calculation of Individual Income from Controlled Foreign Companies further specifies the exemption threshold for individual income derived from CFCs, stating that if the CFC has substance or the current year income of the CFC is below TWD 7 million per year, the income of the said CFC does not need to be included within the individual alternative minimum tax calculation. PwC Taiwan 3

4 However, Regulations Governing Calculation of Individual Income from Controlled Foreign Companies will not come into effect immediately, and is expected to become effective together with corporate CFC regulations. The actual effective date is to be determined by the Executive Yuan. Three tier transfer pricing documentation requirement to take effect starting from 2017 Amendments to Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's-Length Transfer Pricing have been announced on November 13, Taiwan will begin implementing three tier transfer pricing documentation requirement starting from 2017, whereby in addition to the currently required TP report, corporations will also need to provide a Master file and a Country-by-Country-Reporting file. The salient points of the amendment are listed below: Content of Report Country-by- Country-Reporting Master File TP Report Information relating to Main Content the allocation of the MNE group s profit/loss, resources, taxes paid, and primary activities performed by MNE group s value chain analysis, description of intangible assets and financing activities Related party transaction and transfer pricing report each entity Expected threshold of annual consolidated The threshold to be group revenues of TWD determined based on 27 billion or more annual revenues of (equivalent to domestic affiliates and Threshold consolidated group revenues of EUR 750 amount of cross-border controlled transactions. Same as current regulations million or more However, the actual specified in OECD threshold is to be guidelines). However, announced by the the actual threshold is Ministry of Finance. to be announced by the PwC Taiwan 4

5 Content of Report Country-by- Country-Reporting Master File TP Report Ministry of Finance. Annual revenues of domestic affiliate and Basis for determining threshold Consolidated group revenues of the MNE in the preceding year amount of cross-border controlled transactions in the current year meeting the criteria Same as current regulations prescribed by the Ministry of Finance. To be prepared when To be prepared Submission deadline December 31, 2018 the corporate income tax return is filed, and submitted on December when the corporate income tax 31, return is filed PwC Taiwan 5

6 PwC Contacts: Corporate Income Tax and Indirect Tax Services Jason Hsu (Leader) Howard Kuo Pei-Hsuan Lee Ying-Hsun Liu International Tax Services Elaine Hsieh Paulson Tseng (EU Tax) Transfer Pricing & BEPS Services Lily Hsu Financial Services Tax Richard Watanabe Mergers & Acquisitions Tax Elaine Hsieh International Assignment Services Li-Li Chou Corporate Secretarial Services Jack Hwang Outsourcing and Accounting Services Rosamund Fan Tony Lin Sam Hung Li-Li Chou Wilson Wang ext Wendy Chiu (US Tax) Patrick Tuan (China Tax) Elliot Liao Jessie Chen Alvis Lin Tony Lin Sam Hung Rosamund Fan Jack Hwang Alvis Lin Peter Su (ASEAN Tax) The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice. PricewaterhouseCoopers ( PwC ) has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other tax advisers. The materials contained in this publication were assembled in November 2017 based on the law enforceable and information available as of November 16, In the event of any discrepancy between the English information contained in this newsletter and the original Chinese version of the laws or rulings announced by the government, or any difference in the interpretation of the two versions, the Chinese version announced by the government shall prevail PricewaterhouseCoopers Taiwan. All rights reserved. PwC refers to the Taiwan member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC Taiwan 6