Newsletter
Flexibility of and Accounting Rules for Surplus-Earning Distribution, and Effects on Taxation
I. Introduction
Before the latest amendment of the Company Act, companies in Taiwan were required to, in the case of making profits, pay their taxes, make up previous losses and set aside certain earning as the legal reserve before they distribute surplus earnings to their shareholders. However, it is quite common in the US and many European countries that some companies distribute quarter or semi-annual dividends, so many found the regulation, before amendment, quite rigid. Since dividends were allowed to be paid only at the end of each fiscal year, economic flexibility was lost and such earnings were not able to be injected back into markets in time.
Therefore, the latest amendment to the Article 228-1of the Company Act has added two more options for companies: they are now allowed to distribute surplus earnings quarterly or semi-annually as well. Shareholders may receive their returns not long after companies make earnings.
II. Accounting Rules
According to the amended Article 228-1, if a company adopts the resolution to distribute surplus earnings quarterly or semi-annually, it has to settle the account accordingly, and report to its shareholders its result of business activities during such period. In addition, it has to make up its previous losses, retain certain earnings for taxes payable, and set aside the legal reserve before distributing surplus earnings to shareholders.
If such dividends are to be paid in cash, the board of directors' resolution is required. But if a company decides to distribute dividends in stock, a proposal shall be submitted by the board and specifically passed in a general meeting of shareholders, since the shareholders' interest are involved and the extent of change will be larger.
How shall a company handle any over-distribution occurring in the middle of a fiscal year when they close accounts at year end? Pursuant to Article 228-1, the shareholders are not required to return distributed dividends even if there is any loss and over-distribution, retrospectively. Instead, such losses shall be made up from any surplus earning in the future.
III. Effects on Taxation and Responses
The consolidated income tax in Taiwan is generally based on cash; that is, cash income or distribution received during that year shall be subject to taxation of the year. Under this principle, the dividends distributed in the middle of 2019 fiscal year shall be recognized as a part of the shareholder's income and taxed in the tax reporting of the year. If the shareholders are non-residents defined in Income Tax Act (such as foreign corporate shareholders or foreign individuals), they are subject to income tax withholding by the company within ten days of the dividend payment, based on a prescribed withholding percentage (usually 21%, unless a tax cap in a tax treaty/agreement is applicable). If the shareholders are ROC residents (ROC corporates or citizens), no withholding is necessary but the company has to file for a dividend statement by the end of January in the following year.
For ROC-citizen shareholders, the dividends received in the middle of 2019 shall be reported for income tax in 2020. Under the current Income Tax Act, such individuals may choose to separate such dividend income from other incomes for a 28% tax rate imposed on dividend incomes when calculating and reporting their income tax under the category of individual shareholders and others.
The other option for ROC-citizen shareholders is that they can, combine the dividend income into their consolidated income, which shall be subject to tax brackets, with a tax deduction as much as 8.5% of the dividend received in the fiscal year but subject to a cap of NT$80,000 in this deduction item for each taxpayer/tax household.
For ROC corporate shareholders, if the dividends received in the middle of 2019 are reinvested in other profit-seeking enterprises in accordance with Article 42 of the Income Tax Act, such dividends shall not be subject to taxation.
It is noteworthy that a company shall amend its Article of Incorporation if it has decided to distribute dividends quarterly or semi-annually, pursuant to the amended Article 228-1 of the Company Act. Since early distribution of dividends has the effects of prompting shareholders to reinvest, companies should be prudent as to whether to change their own dividend policy.