Newsletter
Amendment to the "Pass-Through Tax Scheme" for Limited Partnerships
The Ministry of Economic Affairs (MOEA) announced that it proposes to amend Article 23-1 of the Statute for Industrial Innovation (產業創新條例; "Draft Amendment") regarding the "pass-through tax scheme" (穿透式課稅) that was originally designed to encourage the formation of venture capital funds in the form of limited partnership and to align with the international market practices.
1. Current Regulation
Under the current regulation, to be qualified for the "pass-through tax scheme", the following conditions must be satisfied:
a. The "pass-through tax scheme" application can be submitted only by a venture capital fund in the form of a limited partnership which is established at any time during the period from January 1, 2017 to December 31, 2029 ("Fund");
b. The amounts of the Fund's "total commitment" as of the end of the calendar year of each of the first and second anniversaries of the Fund are NT$300 million or above, and the amounts of accumulated actual paid-in capital of the Fund as of the end of the calendar year of each of the third, fourth and fifth anniversaries of the Fund are NT$100 million, NT$200 million and NT$300 million, respectively;
c. The amounts of accumulated investment in the Fund's Start-up Companies (as defined in the Statute for Industrial Innovation) as of the end of the calendar year of each of the fourth and fifth anniversaries of the Fund shall amount to 30% of the actual paid-in capital of the Fund as of the end of the calendar day of such year or NT$300 million;
d. The annual investment amount of the Fund that is used to invest in companies incorporated in Taiwan and/or offshore companies which have actual operations in Taiwan shall amount to at least 50% of the actual paid-in capital of the Fund as of the last calendar day of such calendar year (the "Investment Threshold Requirement"); and
e. The application of the "pass-through tax scheme" must be made before the end of February of the subsequent year after the Fund is established.
2. Draft Amendment
The authority believes that under the current regulation, if a Fund has raised the paid-in capital of a total of NT$300 million or more as of the end of the calendar year of its establishment, it would be extremely difficult for the Fund to meet the Investment Threshold Requirement because the Fund would have had to deploy NT$150 million or more investment as of the end of the calendar year of its establishment.
To ease such concern, the Draft Amendment introduces a new concept of "Constructive Paid-in Capital" (決定出資總額) (apart from the original concept of the actual paid-in capital). That is, Funds that have actual paid-in capital of NT$300 million or more by the end of the calendar year of their establishment have an opportunity to choose to determine a constructive amount of paid-in capital of each calendar year throughout a five-year period for the purpose of examining whether conditions (b), (c) and (d) above are met, provided that, the Constructive Paid-in Capital shall be increased each year.
For example, if a Fund has raised an actual paid-in capital of NT$300 million in the first year of its establishment, when applying the pass-through tax scheme with the Industrial Development Bureau of the Ministry of Economic Affairs, it may determine that its Constructive Paid-in Capital as of the end of the calendar year of its establishment and as of each of the following calendar years be deemed as NT$50 million, NT$80 million, NT$100 million, NT$200 million and NT$300 million. In such case, the Fund is only required to invest a total accumulated amount of NT$25 million, NT$40 million, NT$50 million, NT$100 million and NT$150 million as of the year-end of each such calendar year in order to satisfy the Investment Threshold Requirement.
The Draft Amendment has been approved by the Executive Yuan, and the final version thereof will be submitted to the Legislative Yuan for further deliberation and then promulgated by the President.