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COMPANIES CANNOT DECLARE DIVIDENDS DERIVED FROM SHARES PLACED IN TRUST BY SHAREHOLDERS AND DISTRIBUTED TO EMPLOYEES AS BUSINESS EXPENSES
The Ministry of Finance issued a ruling on 10 September 2008 providing that if a shareholder of a company places his shares into a trust and transfers dividends generated by his holdings of shares in the company to company employees and the company declares such dividends as cost of wages and sala-ries in accordance with Statement of Financial Accounting Standards No. 39, "Share-Based Pay-ments," and the circular dated 18 January 2008 of the ROC Accounting Research and Development Foundation, the company may not declare such dividends as business expenses when it files its busi-ness income tax return.
The MOF explained that in terms of legal relationships, if a company shareholder places his holding of company shares into a trust, and transfers dividends generated by the shares to employees of the com-pany, the cash or shares that the employees acquire are made over to them by the shareholder, not by the company, and important aspects of the trust arrangements, such as the scope and eligibility of beneficiaries, and the distribution of trust benefits, are determined by the shareholder that places the shares in trust. The company is not the settlor of the trust and does not in fact pay any consideration to employees who are beneficiaries of the trust. Thus, based on the doctrine of taxation according to law, when the company files its business income tax return, it cannot declare as company expenditures the trust benefits that are transferred to its employees.