The Legislative Yuan Passed the First Reading of the Amendment to the Income Basic Tax Act

12/30/2020

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To maintain tax fairness, the Legislative Yuan passed the first reading of the amendment to the Income Basic Tax Act (the "Draft Amendment") on December 21, 2020. The Draft Amendment requires individuals to include their capital gains from the sale of unlisted shares in calculating their basic income tax (also known as alternative minimum tax; “AMT”).

The policy rationale behind the Draft Amendment is that such capital gains are already exempt from income tax under Article 4-1 of the Income Tax Act. If such gains are further exempt from the calculation of AMT, unlisted shares would easily be used as a tax-planning instrument for taxpayers to convert taxable business income (i.e., dividend income) or taxable capital gains from property transactions into non-taxable capital gains from the sale of shares.

For example, an individual owns a real property through a company and sells the stock in the company to others, thereby transferring the real property to others in substance. Under such circumstances, as the ownership of the real property has not technically been transferred (it remains with the company), taxpayers often use this method to avoid income tax payable on real property transactions.

In addition, under current tax laws, capital gains from share transfers are not subject to income tax or AMT (only the securities transaction tax would be triggered). As such, in this example, the taxpayer not only avoids the tax liabilities on real property transactions but also the tax liabilities on security transactions.

Given that taxpayers often use this method to convert taxable capital gains from property transactions into non-taxable capital gains from the sale of shares, to maintain tax fairness, once the Draft Amendment is passed into law, capital gains from such transactions would be required to be included in the calculation of AMT; if AMT is payable, it would be at 20%.

The tax implications of sale of shares are summarized in the following table:

item			current tax law	after the adoption of the Draft Amendment（expected from January 1, 2021）
securities transactions income tax	company		exemption	exemption
	individual
AMT	company	domestic company	all capital gains from the sale of shares (both listed and unlisted shares) are subject to AMT at a rate of 12%	all capital gains from the sale of shares (both listed and unlisted shares) are subject to AMT at a rate of 12%
		foreign company（without fixed place of business or business agent）	no taxation	no taxation
	individual	tax resident	no taxation	l  unlisted shares: subject to AMT l  listed shares：no taxation
		non-tax resident	no taxation	no taxation
securities transaction tax			0.3% of the transaction price	0.3% of the transaction price