Real Estate and Construction New Rules on House and Land Transactions Income Tax Took Effect on July 1, 2021

08/31/2021

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Taiwan commenced the integrated assessment of the House and Land Transactions Income Tax on January 1, 2016 to address the issues arising from the separate levies of income tax and land value increment tax on housing and land transactions, respectively. In order to curb the continuous surge in housing prices, the Ministry of Finance recently proposed amendments to certain provisions of the Income Tax Act (i.e., the New Rules on House and Land Transactions Income Tax; hereinafter, the "New Rules"). Having gone through three readings in the Legislative Yuan and been announced by the President, the New Rules took effect on July 1, 2021.

A summary of the New Rules is as follows.

1.        Scope of Application (Article 4-4 of the Income Tax Act):

(1)     transaction gains on the following types of properties acquired on or after January 1, 2016: (a) any building or land; (b) the right of use to any building obtained via the creation of superficies; and (c) any presold house and the land lot belonging thereto; and

(2)     income derived by any private individual or corporation (i.e., profit-seeking enterprise) from disposing more than one-half of his/her/its direct or indirect shareholding (or capital contribution) in a domestic/foreign corporation of which fifty percent (50%) or more of equity (or capital contribution), in term of the value thereof, consists of buildings and land located within the Republic of China (Taiwan); nevertheless, shares in companies listed on TWSE and TPEx are excluded.

2.     To discourage private individuals from short-term real estate speculation, a forty-five percent (45%) tax now applies to property transaction gains on buildings or land sold by private individuals within two (2) years of purchase, i.e., an increase from one (1) year before the amendment. Furthermore, those who sell their buildings or land between two (2) to five (5) years of purchase now face a thirty-five percent (35%) tax (Articles 14-4 and 14-5 of the Income Tax Act).

3.     To discourage domestic corporations from short-term real estate speculation and to prevent private individuals from circumventing their tax obligations through setting up corporations, domestic corporations are now subject to the same tax rates as private individuals on their property transaction gains based on how long they were in possession of the buildings or land before the transaction. The 20% corporate income tax (i.e., profit-seeking enterprise income tax) applies only to the property transaction gains on buildings or land sold after five (5) years of purchase (Subparagraph 1, Paragraph 2, Article 24-5 of the Income Tax Act).

4.      Foreign corporations now face a forty-five percent (45%) tax on the property transaction gains on buildings or land sold within two (2) years of purchase -- an increase from one (1) year before the amendment (Subparagraph 2, Paragraph 2, Article 24-5 of the Income Tax Act).

5.      To prevent corporations from circumventing their income tax obligations by inflating the present transfer value of the land reported thereby to an amount higher than the government assessed value of the land, the New Rules stipulate that, after a corporation completes its construction of a building, the income receives thereby from transferring such building for the first time, less the total amount of land value increment, shall be subject to corporate income tax (Paragraph 4, Article 24-5 of the Income Tax Act).

6.        To prevent taxpayers from circumventing their tax obligations by padding the relevant costs and expenses of the transaction, a cap has been imposed on the total amount of land value increment that can be deducted from taxable income. In addition, the presumed amount of expenses (applicable where no evidentiary document can be produced) for real estate transactions are reduced from 5% to 3% of the transaction price with a newly imposed cap of NT$300,000 (Paragraphs 1 and 3 of Article 14-4, Article 14-6, and Paragraphs 2 and 5 of Article 24-5 of the Income Tax Act).

7.      The property transaction gains on buildings or land sold by a sole proprietorship or a partnership are subject to the same tax rates as those applicable to private individuals, and the tax return thereof shall be filed by the sole proprietor or the partner, respectively (Paragraph 6, Article 24-5 of the Income Tax Act).

A comparison of the pre and post-amendment rules is provided below:

 

Scope of Application	Tax Rate	Length of Possession before Sale
		Before the amendment	After the amendment (i.e., the New Rules)
Domestic Private Individuals	45%	≤ 1 year	≤ 2 years
	35%	1~2 years	2~5 years
	20%	2~10 years	5~10 years
	15%	> 10 years	> 10 years
	Filing Period	Within 30 days after the transaction	Within 30 days after the transaction
Foreign Private Individuals	45%	≤ 1 year	≤ 2 years
	35%	> 1 year	> 2 years
	Filing Period	Within 30 days after the transaction	Within 30 days after the transaction
Domestic Corporations	45%	(20%; i.e., corporate income tax rate)	≤ 2 years
	35%		2~5 years
	20%		> 5 years
	Filing Method	Combined assessment, filing and payment	Separate assessment/combined filing and payment
Foreign Corporations	45%	≤ 1 year	≤ 2 years
	35%	> 1 year	> 2 years
	Filing Method	Separate assessment/combined filing and payment	Separate assessment/combined filing and payment
Not Affected by the New Rules	l   The property transaction gains received by private individuals and corporations from the following transactions remain subject to the 20% tax rate: (1)       sale of buildings or land within five (5) years of purchase due to a job transfer, involuntary termination of employment or other unavoidable circumstances; (2)       sale of buildings built by anyone on his/her/its own land in collaboration with a corporation within five (5) years from the date of land acquisition; and (3)       sale of buildings or land for the first time within five (5) years of the acquisition thereof by anyone who acquired such building or land due to his/her/its participation in a project of urban renewal and redevelopment of old and dilapidated buildings by providing real estate or funding. l   The property transaction gains on the sale of the house and land actually used as the residence of the owner who has  maintained his/her household registration at the address thereof for six (6) consecutive years enjoy a NT$4 million exemption; a ten percent (10%) tax applies to the part of such gains exceeding NT$4 million. l   The period of an individual's possession of the buildings and land includes the period of possession thereof by his/her decedent, bequeather or spouse, in the event that such individual inherits, is bequeathed or is given the buildings and land as a gift.

 

The New Rules on House and Land Transactions Income Tax took effect on July 1, 2021 and will not only affect the timeline for future transactions but also be a key consideration for making relevant tax arrangements. It is advisable to be alerted to the New Rules and plan ahead when conducting real property transactions.