Taiwan Tax Alert - 27 July 2012
Capital gains tax introduced on sale of securities
By Al Chang and Austin Chen
The Taiwan Legislative Yuan passed an amendment to the Income Tax Act on 25 July 2012 that introduces a capital gains tax on the sale of securities. The new rules, which will affect both individuals and enterprises, come into effect on 1 January 2013.
Under current rules, capital gains derived from the sale of securities are exempt from income tax for corporate taxpayers, but are considered a taxable item under the alternative minimum tax (AMT) regime. The tax treatment is similar for individual taxpayers, except that only gains from the sale of unlisted securities are considered a taxable item under the AMT regime.
Under the amended rules, gains derived by a profit-seeking enterprise from the sale of listed and unlisted shares, futures and options traded on the Taiwan Futures Exchange, and other marketable securities, will remain within the scope of the AMT regime. However, the amount of the exemption will be reduced from NTD 2 million to NTD 500,000 and the AMT rate will increase from 10% to 12%. Fifty percent of the capital gains will be exempt if the securities are held for more than three years, and losses will be available for carryforward for up to five years. It should be noted that the 2% AMT rate increase also will apply to other AMT add-back items (e.g. tax holiday income).
The amendments further clarify that a nonresident profit-seeking enterprise that does not have a fixed place of business or business agent (i.e. a PE) in Taiwan will not be required to pay AMT on gains from the above transactions. However, if a foreign enterprise does have a PE in Taiwan, it will be subject to the same tax treatment as a resident profit-seeking enterprise.
The new law features the following for resident individuals:
- A dual reporting system from 2013 to 2014;
- A single tax system starting in 2015; and
- An exclusion from the AMT calculation for gains on the sale of securities.
Under the dual reporting system, an individual tax resident can select one of two options to pay capital gains tax on the sale of shares. The first option is to pay a flat tax at a rate of 15% or 20% on capital gains derived from transactions relating to securities and beneficiary certificates of private equity funds, respectively (Option 1). A taxpayer electing Option 1 must file an income tax return and include the gains and relevant tax paid in his/her return. The second option is a withholding regime with progressive tax rates ranging from 0.02% to 0.06% on the selling price of the shares (Option 2) when the market's benchmark index reaches 8,500 points or higher. The following individuals, however, will not be eligible for Option 2:
Those who sell more than 100,000 shares trading on the Taiwan Emerging Stock Market;
- Those who sell more than 10,000 shares acquired from a company's IPO via an underwriter;
- Those who sell shares acquired from a company's IPO on the Taiwan securities markets after 1 January 2013; and
- Nonresident individuals (nonresidents will only be able to select Option 1).
Under current practice, a nonresident can only invest in Taiwan securities via the Foreign Individual Investor (FIDI) regime. The amended rules, are unclear, however, on the compliance procedures for a nonresident who invests in Taiwan via the FIDI.
For individuals who select Option 1, 50% of the capital gains will be exempt if the shares are held for up to one year; those who hold IPO shares can exempt 75% of the capital gains if the shares are held for at least three years after the IPO. Option 2 will be phased out starting from 2015, and individuals whose annual trading amount exceeds NTD 1 billion will be brought within the system.
All multinational companies (except FINIs without PEs in Taiwan) that have Taiwan operations or Taiwan subsidiaries or that have merger and acquisition projects in the pipeline or that intend to issue an IPO in the Taiwan securities market in the future should begin to review their current investment structures and/or operating models to avoid or minimize any adverse tax impact arising from to the new rules.