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Tax Exemptions under the M&A Act Now Applicable to More Types of Spin-off Transactions

Leo Tsai/Judy Lo


The amendment to the Business Mergers and Acquisitions Act (the "M&A Act") enacted in January of 2016 stipulated in Paragraph 1, Article 39 that for a spin-off transaction, if voting shares are given to the original company as the consideration of the transaction and if such consideration takes up more than 65% of the total consideration, such transaction can enjoy exemptions of stamp duty, deed tax, securities transaction tax and business tax, as well as a deferral of land value increment tax.  However, this Article does not specify whether such tax exemptions are only applicable to vertical spin-offs but not horizontal spin-offs (e.g. when a company splits off its R&D department into a separate entity), where the considerations are paid to the shareholders of the original company.
 
As such, the Ministry of Finance promulgated a Tax Ruling on July 28, 2017 (Ref. No.: Tai-Tsai-Shui-Zi-10600029170) to further clarify that when a company spins off a part of its business pursuant to the M&A Act, the tax exemptions provided in Paragraph 1, Article 39 of the M&A Act shall apply if voting shares are given to shareholders of the original company as the consideration of the spin-off transaction and if such consideration takes up more than 65% of the total consideration. Such Tax Ruling clarified that the tax exemptions provided under Paragraph 1, Article 39 of the M&A Act are applicable to both vertical and horizontal spin-off transactions. Also, if under a spin-off transaction, the original company acquired parcels of land and enjoyed the deferral of the land value increment tax under Subparagraph 5, Paragraph 1, Article 39 of the M&A Act within 3 years of the transfer registration of such parcels of land, the shareholders who received shares as consideration on the record date of the spin-off transaction shall be subject to the restrictions under Paragraph 2, Article 39 of the M&A Act.
 
In addition, the above-mentioned Tax Ruling also clarified that the scope of "total consideration" referred to in Paragraph 1, Article 39 of the M&A Act shall be governed by the Business Entity Accounting Act, Regulation on Business Entity Accounting Handling, Enterprise Accounting Standards, and the International Financial Reporting Standards, International Accounting Standards, and other relevant interpretations and interpretation announcements recognized by the Taiwan Financial Supervisory Commission. The foregoing regulations and interpretations shall also be applicable in calculating whether the voting shares given to the shareholders of the original company as consideration of the transaction exceed 65% of the total consideration.

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