• Payment and Calculation of Securities Transaction Taxes or Income Taxes for the Trading Of Equity Securities of Companies Limited by Shares in the ROC
  • July 13, 2012
  • Law Firm: Lee Tsai Partners Attorneys-at-Law - Taipei Office
  • If a foreign profit-seeking enterprise which does not have any fixed place of business and business agent within the territories of the Republic of China (hereinafter, the “Seller”) seeks to sell the equity securities of companies limited by shares in Taiwan to a company in the ROC with installment payments for the sale, whether the Seller is required to pay securities transaction taxes or income taxes and how the tax amount should be calculated and how the payment should be made are discussed below. 

    I. A Seller is required to pay securities transaction taxes for the trading of equity securities in companies limited by shares only when the object companies issue stocks.  If the object companies do not issue stocks, although the Seller is not required to pay securities transaction taxes, income taxes should still be paid when income is generated from property transactions. 

    (1) Article 1 of the Statute for Securities Transaction Taxes provides as follows:  “any purchase or sale of marketable securities” shall be subject to securities transaction taxes pursuant to the Statute with the exception of bonds issued by all levels of governments. 

    The so-called “marketable securities” set forth in the preceding paragraph shall refer to bonds issued by all levels of governments and stocks and corporate bonds issued by companies as well as other marketable securities that may be publicly placed with government approval.” 

    (2) Pursuant to the Tai-Cai-Shui-790191196 Circular of April 30, 1991 and the Tai-Cai-Shui-0910450541 Circular of February 7, 2002 from the Ministry of Finance, for a company that is not required to issue stock pursuant to the last part of Article 161-1, Paragraph 1 of the Company Law, the trading of shares issued by such company does not give rise to the issue of securities transaction taxes.  However, since these are deemed property transactions, income generated from such property transactions shall be subject to income taxes. 

    (3) Conclusions:

    1. If object company issues stocks, the parties are trading marketable securities

    (a) Pursuant to the Tai-Ca-Shui-30644 Circular of January 30, 1974 from the Ministry of Finance, the Seller shall pay securities transaction taxes regardless of whether the assignment or transaction is completed inside or outside Taiwan. 

    (b) The Seller is not required to pay income taxes in Taiwan for the above-mentioned securities transaction. 

    i. The income generated by the Seller from the sale of the said marketable securities should be deemed originated from the ROC:  Under Article 3, Paragraph 3 of the Income Tax Law, the ROC income taxes shall still be paid for income originated from the ROC.  Since the object company for the said securities transaction is a company limited by shares in the ROC, its marketable securities are “personal property registered within the territories of the ROC” under Item 7:2(1) of the Principles for Recognizing Income Originated from the Republic of China under Article 8 of the Income Tax Law in tax levy practices. Therefore, income generated from the transaction of said marketable securities shall be deemed income originated from the ROC pursuant to Article 8, Subparagraph 7 of the Income Tax Law, which stipulates that “the income originated from the Republic of China under this Law shall refer to any of the following incomes:  ...(7) any gain from any property transaction within the territories of the ROC.”

    ii. The Seller is not required to pay income taxes in Taiwan for the above-mentioned securities transaction.

    Under Article 4-1 of the Income Tax Law, securities transaction income taxes are not levied.  In addition, since the Seller does not have a fixed place of business and business agent within the territories of the ROC, the Seller is not an object of tax levy under the Statute for Basic Income Tax Amounts and is thus not required to include the income whose income tax is exempt pursuant Article 4-1 of the Income Tax Law in the calculation of the basic income amount and to pay the minimum taxes in accordance with Article 7, Paragraph 1, Subparagraph 1 of the Statute for Basic Income Tax Amounts.  Therefore, the Seller is not required to pay income taxes in Taiwan for the above-mentioned securities transactions.

    2. If the object company does not issue stock: 

    (a) The Seller is not required to pay securities transaction taxes. 

    (b) The Seller is required to pay income taxes in Taiwan for income generated from property transactions. 

    Under Article 3, Paragraph 3 of the Income Tax Law, the Seller is required to pay income taxes of the ROC for income originated from the ROC.  Since the object company for the said securities transaction is a company limited by shares in the ROC, its marketable securities are “personal property registered within the territories of the ROC” under Item 7:2(1) of the Principles for Recognizing Income Originated from the Republic of China under Article 8 of the Income Tax Law in tax levy practices. Therefore, income generated from the transaction of said marketable securities shall be deemed income originated from the ROC pursuant to Article 8, Subparagraph 7 of the Income Tax Law, which stipulates that “the income originated from the Republic of China under this Law shall refer to any of the following incomes: ...(7) any gain from any property transaction within the territories of the ROC.”

    II. The calculation of the Seller’s taxes in case of stock payment by installment by the buyer: 

    (1) When the object company issues stock and the Seller is required to pay securities transaction taxes: 

    1. Calculation based on “the closing price of each transaction”

    Under Article 2 of the Statute for Securities Transaction Taxes, the securities transaction taxes are calculated by multiplying the “closing price of each transaction” by 0.003 and have nothing to do with net asset value pursuant to the Tai-Cai-Shui-31501 Circular of March 9, 1979 from the Ministry of Finance. 

    2. How can the “number of transactions” be recognized? 

    If the object shares are transferred in their entirety at once, this will be recognized as “one transaction” in tax levy practices.  Therefore, securities transaction taxes are calculated by multiplying the “total price set forth in the stock transaction contract” by 0.003.  If the “stock transaction contract” stipulates price payment by installment and pro rata transfer of shares, this is recognized as “several transactions” in tax levy practices and the securities transaction taxes are also calculated by multiplying "each payment” by 0.003. 

    (2) When the object company does not issue stock and the Seller is required to pay property transaction taxes: 

    Although the buyer delivers the stock payment by installment, still Article 24, Paragraph 1 of the Income Tax Law provides:  “the amount of income of a profit-seeking enterprise shall be the net income, i.e., the gross yearly income after deduction of all costs, expenses, losses and taxes.  When calculating the amount of income in which there are taxable and exempt incomes involved, the relevant costs, expenses or losses, except that those which are attributable to such respective income in a direct, reasonable and definite way, which may be attributed to thereby and recognized as its deductions respectively, shall be reasonably allocated to the respective income.  Measures regarding such allocation shall be prescribed by the Ministry of Finance.”  The income generated from the property transaction of the equity securities at issue should be calculated by the “total price set forth in the stock transaction contract subtracted by the Seller’s original equity securities acquisition cost” and shall serve as the
    Seller’s profit-seeking enterprise income for the year of the “execution date of the stock transaction contract.” 
     
    III. Manners of payment of the Seller’s taxes: 

    (1) When the object company issues stock and the Seller is required to pay securities transaction taxes:

    1. Since the parties to a transaction have entered into a transaction contract, involving “direct assignment to the assignee by the holder” instead of circumstances of “a sale engaged by a securities broker on behalf of its client” or “a securities underwriter’s sale of its underwritten marketable securities,” the assignee of the securities (i.e., the buyer) should be the collecting agent in accordance with the first part of Article 4, Paragraph 1, Subparagraph 3 of the Statute for Securities Transaction Taxes. 

    2. Under Article 2 and Paragraph 1 of Article 3 of the Statute for Securities Transaction Taxes, the securities transaction taxes to be collected by the collecting agent on the day the transaction is settled shall be calculated by multiplying the closing price of each transaction by 0.003 and paid to the treasury on day following the collection by submitting the tax bills. 

    3.   Penalties

    (a) If the collecting agent fails to perform the collection obligation or has shortfalls or omission of collection: 

    Such collecting agent shall be required to pay and the competent tax agency shall levy the taxes on a supplemental basis in accordance with Article 9-1 of the Statute for Securities Transaction Taxes.  In addition, a fine equivalent to 1 to 10 times the amount of uncollected tax will be imposed. 

    (b) If the collecting agent fails to pay the taxes on the day following the collection: 

    Under Article 11 of the Statute for Securities Transaction Taxes, a penalty for overdue payment equivalent to 1% of the amount overdue shall be imposed every two days after the due day, and this matter shall be referred to compulsory execution if payment is not made within 30 days after the due day. 

    (2) When the object company does not issue stock and the Seller is required to pay income taxes for the income generated from property transaction: 

    1. If the Seller is a foreign profit-seeking enterprise without a fixed place of business and business agent within the territories of the ROC, the income from property transaction does not fall within the scope of withholding taxes pursuant to the opposite interpretation of Article 88, Paragraph 1, Subparagraph 2 of the Income Tax Law.  Therefore, under Paragraph 2 of Article 72 and Paragraph 1 of Article 73 of the Income Tax Law, Paragraphs 1 and 2 of Article 60 of the Enforcement Rules of the Income Tax Law, and Paragraph 1 of Article 11 of the Standards for All Categories of Withholding Rates, such foreign profit-seeking enterprise shall, on its own or with the approval of the tax agency, retain an individual residing within the territories of the ROC or a profit-seeking enterprise with a fixed place of business to be an agent to file and pay taxes based on a withholding rate of 20%.  

    2. Penalties for failure to file taxes within the required period

    Under Article 108, Paragraphs 1 and 2 of the Income Tax Law, if the Seller fails to file taxes within the period set forth in Article 71 of the Income Tax Law: 

    (a) In case of supplemental filing in accordance with Article 79, Paragraph 1 of the same law where the tax agency has assessed the income and payable tax amount, a penalty for overdue payment equivalent to 10% of the payable tax amount assessed shall be additionally imposed, provided that such penalty shall not exceed NT$30,000 but shall not fall below NT$1,500. 

    (b)  If the period of supplemental filing under Paragraph 1 of Article 79 is exceeded when taxes are still not filed, when the tax agency has assessed the amount of income or taxes payable based on identified information or the profit standard of the same trade concerned, a penalty for late filing equivalent to 20% of the tax payable amount as assessed shall be additionally imposed, provided that this shall not exceed NT$90,000 but shall not fall below NT$4,500.