In relation to the consolidationof buildingand land taxes system, on 5 June 2015, the Legislative Yuan passed the bill concerning the draft amendments to several provisions ofthe Income Tax Act and Article 6-1 of the Specifically Selected Goods and Services Tax Act (collectively, "Amendments"). The President promulgated the Amendments on 24 June 2015 and the effective date of the Amendments is 1 January 2016. Lee & Lipublished an article summarizing the major points of the Amendments on June 26, 2015. Thisarticle is to supplement the previous article from a tax perspective.
I. Legislative Background of the Amendments:
Prior to the Amendments, the Taiwan property tax system separates the tax treatment of a sale of building and a sale of land. Gains from the sale of a land is exempt from income tax, but is subject to the land value increment tax based on the government-assessed value ("GAV") of the land (usually lower than the actual sale prices). Gains from the sale of a building is subject to income tax, and in most cases, the gains are assessed based on the GAV of the building (usually lower than the actual sale prices). Some investors took advantage of the current "low-tax-base/low-tax rate" property tax system in property transactions which indirectly resulted in property prices soaring in recent years. Most people are dissatisfied with the lack of affordable housing due to high property prices and would like the government to establish a reasonable/equitable property tax system to stabilize the property market.
In order to tackle this trend, the Ministry of Finance proposed an amendment to combine the tax treatment in relation to the sale of building and the sale of land by imposing income tax on the total amount of gains ("Consolidation ofBuildingand Land TaxesSystem"). The Amendments were approved by the Executive Yuan (the Cabinet Office) and was forwarded to the Legislative Yuan (the Parliament) for approval.
II. Key points of the Amendments:
1. Tax Scope
From 1 January 2016, sales of the following buildings and/or land will be subject to the Consolidation ofBuildingand Land TaxesSystem:
l Buildings and/or land acquired after 1 January 2016;
l Buildings and/or land acquired after 1 January 2014, and owned for less than two years prior to sale.
2. Tax Base
l The tax exemption under Article 4 of the Income Tax Act is not applied to the capital gains from the sale of land under the Tax Scope.
l Tax base (taxable net gains) = (revenue of building based on actual sale prices + revenue of land based on actual sale prices) – costs – expenses – incremental GAV of the land based on the Land Tax Act (for the purpose of avoiding double taxation)
l When a building and/or land is obtained through inheritance or legacy, the transaction costs of the building and/or land will be calculated based on the GAV of the building/land at the time of inheritance or legacy and adjusted by the Consumer Price Index released by the Government.
1. Tax Rate and Tax Benefits for Long-Term Owned Property
l Taiwan residents: The applicable tax rates apply in respect of the following: the tax rate of 45% for buildings and/or land owned for less than one year prior to the sale; the tax rate of 35% for buildings and/or land owned for more than one year but less than two years prior to the sale; the tax rate of 20% for buildings and/or land owned for more than two years but less than ten years prior to the sale; the tax rate of 15% for buildings and/or land owned for more than two years but less than ten years prior to the sale. The purpose of the above is to restrain short-term investment in property and encourage long-term possession of property.
l Moreover, when an heir or a legatee sells a building and/or land obtained through inheritance or legacy, his or her holding period of such building and/or land can include the period the said building and/or land was held by the deceased.
l In addition, to maintain the reasonableness of the new property tax system, for buildings and/or land owned for less than two years prior to the sale thereof due to (i) a job transfer, involuntary separation from employment, or any other involuntary cause of a seller, or (ii) a seller who uses his or her own land to enter into a joint construction and allocation project with a profit-seeking enterprise and subsequently sells his or her share, the tax rate will be reduced to 20%.
l Non-Taiwan residents: The applicable tax rates apply to the following: the tax rate of 45% for buildings and/or land owned for less than one year prior to the sale; the tax rate of 35% for buildings and/or land owned for more than one year prior to the sale.
l Taiwan profit-seeking enterprises: The single tax rate of 17% for buildings and/or land for whatever ownership period prior to the sale.
l Non-Taiwan profit-seeking enterprises: The applicable tax rates are as follows: the tax rate of 45% for buildings and/or land owned for less than one year prior to the sale; the tax rate of 35% for buildings and/or land owned for more than one year prior to the sale.
l For a non-Taiwan profit-seeking enterprise which directly or indirectly holds half or more of the shares/capital of another non-Taiwan profit-seeking enterprise and more than 50% of the latter's share value is composed of the building(s)/land in Taiwan, when the former transacts the shares it holds in the latter, the former should file an income tax return by applying the tax rate in the preceding paragraph for such transaction.
2. Tax Benefits for Self-Use Residential Property of Taiwan Residents
l Self-use residential property not provided for business use or for rent, and the Taiwan resident himself/herself, his/her spouse, or infant child has a household register for the building and they actually live in the building for six consecutive years;
l Tax exemption for the net gains under NT$4 million; the tax rate of 10% for the portion of the net gains over NT$4 million.
l Taiwan residents can claim tax benefits for self-use residential property only once within a six-year period.
3. Tax Refund by Taiwan Residents Repurchasing Self-Use Residential Property
Similar to the current system, Taiwan residents who have already paid the relevant tax for the sale of their self-use residential property can apply for a tax refund when repurchasing another self-use residential property.
4. Tax Assessment
l Capital gain from the sale of a building/land is subject to separate taxation. A taxpayer should file an income tax return for the said income within 30 days starting from the next date that the transfer of property rights has been registered.
l If a taxpayer fails to file an income tax return for the said income on time or declares the amount incorrectly, the tax authorities can assess the revenue /cost of the transaction based on the audit documents it obtained, or assess the expenses of the transaction based on 5% of the transaction price.
5. Correspondingly, the Specifically Selected Goods and Services Tax (regarding taxation on the sale of property) will be abolished from 1 January 2016 for the purpose of stabilizing the development of property market.
III. Impact of the Amendments:
As the above Amendments have been legislated, it will present a significant change in that property sellers will be taxed on both building and land and based on their capital gains from the actual sale prices rather than the GAV. The seller of property should evaluate the tax risks of the new property tax system, so as to mitigate the possible disadvantages.