Newsletter
Amendments to the Statute for Industrial Innovation to Increase Tax Incentives
With the purpose of rewarding innovation, research and development, and talent retention, the Legislative Yuan approved the Amendments to the Statute for Industrial Innovation ("Statute") on November 3, 2017, thereby increasing the number of tax incentives provided under the Statute. The new tax incentives are summarized as follows:
1. Limited partnerships that meet certain requirements may adopt pass-through taxation
A limited partnership formed between January 1, 2017 and December 31, 2019 in accordance with the Limited Partnership Act may adopt pass-through taxation for the first 10 years of its operations (this period may be extended for an additional 5 years) if it meets certain requirements such as:
(i) the limited partnership must meet the capital contribution requirements prescribed by the Statute. For example, the year-end amounts of capital contributions for the year of establishment and the second year of operations must both exceed NT$300 million;
(ii) the amount of funds used within Taiwan or invested in foreign companies with actual business activities in Taiwan each year must be greater than 50% of each year's total amount of capital contributions received; and
(iii)the limited partnership must obtain annual approvals from the Ministry of Economic Affairs.
Under the pass-through taxation system, the limited partnership is not subject to corporate income tax. Instead, the income of the limited partnership is allocated to each partner according to his/her earnings allocation ratio and consolidated into his/her net taxable income for calculating his/her individual income tax liability.
2. Tax incentives for angel investors
To help start-up companies obtain working capital, an individual who (i) invests at least NT$1 million in cash in a year in a domestic high-risk start-up company established for less than two years and (ii) holds the company's shares for more than two years, may deduct up to 50% of his/her invested capital from his/her gross income of the third year. However, the above deduction is limited to NT$3 million a year.
3. Taxation of stock-based employee compensation may be deferred until the shares are transferred
According to previous regulations, where an employee acquired stock-based employee compensation, the employee may opt to defer the assessment of the income tax payable under the Income Tax Act on up to an annual total of NT$5 million worth of acquired shares (calculated at the market price prevailing at the time of acquisition) until the fifth year after the year he/she acquired the shares. In order to enhance the incentive for talent retention, under the Amendments to the Statute, the aforementioned five-year deferral period is extended indefinitely. However, if such shares are transferred (change in the ownership of shares as a result of sale, gift, distribution as estate, or other causes), or are delivered by book-entry transfer to a securities custody account, the income tax shall be payable in the year of transfer or book-entry transfer based on the market price prevailing at the time of transfer or book-entry transfer. Once the decision is made to defer income tax according to the option above, it cannot be changed.
4. Limited partnerships may enjoy research and development (R&D) tax benefits
In addition to the tax benefits that were previously available to companies and individuals, under the Amendments to the Statute, a limited partnership may also enjoy tax benefits. There are two tax benefits available for limited partnerships and a limited partnership may choose to claim either, but not both.
A. Investment tax credit:
A limited partnership may claim a tax credit of up to 30% of its current year income tax liability for expenses incurred for R&D. The tax credit can be applied according to one of the following two methods. No change in method is allowed once the choice has been made.
(1) Up to 15% of R&D expenses may be credited against the income tax payable by the limited partnership in the current year; or
(2) Up to 10% of R&D expenses may be credited against the income tax payable by the limited partnership in each of the following three years, starting from the current year.
B. Deduction from taxable income:
Where a limited partnership receives revenue from assignment or licensing of its internally developed intellectual property rights, up to 200% of its R&D expenses in the current year may be deducted from the amount of its taxable income. The amount that can be deducted is capped at the amount of revenue received from the intellectual property rights that year.
5. Taxation of stock received by creators of technology may be deferred until the shares are transferred
Where a domestic academic or research institute obtains shares in exchange for contributing its internally developed technology and transfers the said shares to the domestic creators of the said technology, the domestic creators may choose to defer taxation on the value of the shares received until such shares are transferred. In this scenario, tax shall be levied based on the market price prevailing at the time of transfer.
All tax incentives, with the exception of the adoption of pass-through taxation by limited partnerships mentioned in point 1 above, will cease on December 31, 2019.