Newsletter
TRUST-RELATED TAX LAW AMENDMENTS ENACTED
A trust is a relationship created whereby a settlor (the creator of a trust) transfers the legal title in an asset, or otherwise disposes of the asset, so as to have a trustee manage or dispose of the transferred property in accordance with the trust deed, for the benefit designated persons or for a specified purpose. During the term of a trust, ownership of the assets placed in trust, and the power to administer trust assets, are separated from right to enjoy the benefit derived from the asset.
In other words, when a trust is created, the trustee holds the legal title of the trust assets, but the beneficiary is the real owner who enjoys the benefit of trust assets. The trust deed may also specify a point in time at which the trustee will transfer ownership of the trust assets to the beneficiary. Trusts are vehicles to provide flexibility in asset management, benefits distri-bution, asset preservation and tax planning.
In response to social and economic development and the needs of society, the Trust Law was en-acted on 26 January 1996, to provide a legal framework for the trust system. The Trust En-terprises Law was subsequently promulgated on 19 July 2000. However, the tax consequences under the trust arrangement were uncertain due to the absence of relevant tax provisions, posing an obstacle to the adoption of a trust arrange-ment.
In September 1999, the Executive Yuan ap-proved draft amendments to six tax laws: the Estate and Gift Tax Law, the Income Tax Law, the Business Tax Law, the Land Tax Law, the House Tax Statute and the Deed Tax Statute. The amendments add provisions to these laws in line with the structure provided under the Trust Law to address tax issues arising from the op-eration of a trust. The Legislative Yuan com-pleted the third readings of these amendments on 29 May 2001, and the President promulgated them on 13 June 2001. The Executive Yuan prescribed the effective day for these amend-ments to be 1 July 2001. The entire legislative process to establish the tax related framework for property in trust is thus completed. The trust system is now ready to go into full operation.
The following is a brief introduction the tax provisions under the trust arrangement.
The taxation of trust arrangements adopts the doctrine of substance. Taxes relevant to the transfer of property will only be imposed at the time of a transfer in substance, rather than at the time of a mere transfer in form. The following table sets out transactions that are considered transfers in form and therefore are not taxable:
| Timing of transac-tion | Parties to trans-fer of trust property | Income tax | Gift tax | Land value in-crement tax | Deed tax | Business tax | |
| Creation of a trust | Settlor and trustee | Exempt to trustee | Exempt to settlor | Exempt to settlor | Exempt to trustee | Exempt to settlor | |
| During the term of a trust | Change of trustee | Original trustee and new trustee | Exempt tonew trus-tee | Exempt to origi-nal trus-tee | Exempt to original trustee | Exempt to new trustee | Exempt to original trustee |
| Trustee transfers trust property to benefi-ciary un-der trust deed | Trustee and beneficiary | Exempt to benefici-ary | Exempt to trustee | ||||
| At termination/expiry of a trust | Settlor and trustee | Exempt to settlor | Exempt to trustee | ||||
| Trustee and beneficiary | Exempt to benefici-ary | Exempt to trustee | Exempt to trustee if the trust was cre-ated by a will | Exempt to beneficiary if the trust was created by a will | |||
| Where creation of a trust fails, or a trust is invalid, rescinded, or annulled | Settlor and trustee | Exempt to settlor | Exempt to trustee | Exempt to trustee | Exempt to settlor | Exempt to trustee | |
The amendments to the tax laws are summarized as follows:
Estate and Gift Tax Law
Where a trust is created by a will, estate tax is imposed on the trust property at the death of the testator. If a beneficiary dies during the term of a trust, estate tax is imposed on the value of his beneficial interest in the trust.
Gift tax is payable if the trust deed stipulates a beneficiary other than the settlor. Where a gift is made to a qualified public trust, the property so gifted is not includible in the donor's total annual gifts or the testator's total estate.
Income Tax Law
Where the settlor is a profit-seeking enterprise and the beneficiary is not the settlor, the benefi-ciary must include the value of beneficial interest received from the trust along with his other in-come in the declaration of annual income tax return.
Where a profit-seeking enterprise provides property to establish or donate to a qualified public trust, the value of the beneficial interest is not taxable to the qualified public trust.
Income generated from trust property, after de-ducting costs, necessary expenses and wear and tear, should be allocated among beneficiaries by the character of income and included in the beneficiaries' taxable income in the year when the income occurred. Beneficial interest re-ceived from a public trust should be included in the beneficiaries' taxable income in the year of distribution. Income from a mutual trust fund, securities trust fund and etc., which have been approved by the competent authority in charge, is includible in the taxable income of benefici-aries in the year of distribution.
An individual or a profit-seeking enterprise, that provides property to establish or donate to a public trust, may take the deductions for the amount donated in calculating the taxable in-come.
A trustee must keep separate books for each trust, record all transactions in detail, and obtain sup-porting documents for all payments.
By the end of January each year, a trustee should submit to the tax authority in prescribed forms a detailed list of trust properties, an income and expenditure statement, income allocable or dis-tributed to beneficiaries and amount of with-holding taxes allocable to beneficiaries for the preceding year. By February 10 of each year, a trustee should issue to the beneficiaries tax withholding statements, tax withholding exemp-tion statements and other relevant statements for the preceding year.
Business Tax Law
Proceeds from the sale of goods by tender offer or charity sale, or from performances or shows for the benefit of a public trust, are exempt from business tax if the proceeds are used exclusively for the benefit of the public trust.
Land Tax Law
Where trust property includes land, the trustee is the taxpayer for the land value tax or the farm-land tax during the term of the trust.
The value for land held in trust should be added to the value of all other land owned by the settlor in the same municipality, county or city to cal-culate land value tax at the prescribed rate. Where the beneficiary of the trust is not the settlor, and the beneficiary is identified and en-joys the full benefit of the trust, or the settlor has not reserved the right to change the beneficiary, land value tax should be calculated by adding the value of the land in trust to the value of land owned by the beneficiary in the same adminis-trative jurisdiction.
During the term of the trust, if the trustee trans-fers the title of land held in trust to another for consideration, pledges it to another, or acquires the title for the trustee itself in accordance with the relevant provisions of the Trust Law, the trustee is liable to pay land value increment tax. If the trustee transfers the title of land to a person other than the settlor who is entitled to receive such land in accordance with the relevant provi-sion of the trust deed, then the recipient becomes liable to pay land value increment tax.
When land is a trust property, the land value in-crement tax is exempted at the transfer of own-ership in form between the parties to the trust arrangement. At such later time as the trust land is transferred or pledged to another, or trans-ferred to the trustee in accordance with the relevant provisions of the Trust Law, the increase in value, for the purpose of the imposition of land value increment tax, is calculated by adopting the last government prescribed land value before the transfer in form or the last assessed transfer value as the original land value.
In the case of a trust created by a will, where the original trust property includes land and the trust land is later transferred or pledged to another, or transferred to the trustee in accordance with the relevant provisions of the Trust Law, the "original land value" for purposes of assessing land value increment tax refers to the govern-ment prescribed land value at the testator's death.
House Tax Statute
Where the trust properties include a building, the trustee is the taxpayer of the house tax during the term of the trust.
Where a public trust is established with the ap-proval of the relevant competent authority in charge, a building is exempt from house tax if the building is acquired by the trustee for the trust and used directly for carrying out activities for the public benefit.
Deed Tax Statute
Where trust properties include real property, and the trustee transfers such property to a person other than the settlor in accordance with trust deed, the recipient must pay deed tax at the rate for gifts.