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ACCOUNTING AND INCOME TAX TREATMENT OF PREMIUM IN-COME FROM DISPOSAL OF ASSETS
Josephine Peng
The amended Company Law repealed Article 238, which regulated capital reserves. As a re-sult, capital reserves revert to being governed by the Business Accounting Law and other related provisions. In announcements dated 14 March, 26 March and 4 April 2002, the Ministry of Economic Affairs (MOEA) issued related ac-counting principles that require capital reserves in the form of capital gains from the disposal of assets to be handled as follows:
Those arising in fiscal year 2001 should be recorded as non-operating income or extraor-dinary profit, as the case may be, in accor-dance with Article 34 Paragraph 3 of the Guidelines for Handling Business Account-ing.
A company may decide for itself, as a matter of corporate self-governance, whether to re-tain amounts accumulated from fiscal year 2000 and earlier as capital reserve, or to transfer them to retained earnings. However, such a transfer requires the consent of the most recent shareholder meeting by fiscal year 2003 at the latest, or the consent of all shareholders. If the company opts to transfer such capital reserves to retained earnings, all such amounts must be transferred at one time. In the absence of a consenting resolution of a shareholders' meeting, or the consent of all shareholders, such amounts must be remained as capital reserve. They may not be converted to capital, but may only be retained to cover possible future losses.
In line with the above amendments, on 17 April 2002 the MOEA announced the addition of a new Article 34-1 to the Guidelines for Handling Business Accounting Handling, as follows:
“A company may decide by resolu-tion of the most recent shareholder's meeting, or by the consent of all shareholders, whether to retain capital gain from the disposal of assets arising in or before fiscal year 2000 as capital reserve, or to trans-fer such income to retained earnings. All such amounts must be treated in the same way, and all must be dealt with at one time.”
On 28 May 2002, the Ministry of Finance an-nounced related tax guidelines, as follows:
Where a profits-seeking enterprise has capital reserves in the form of capital gains generated from the disposal of assets in or before fiscal year 2000, and such reserves are transferred to retained earnings with the resolution of a shareholders' meeting or consent of all shareholders, any part derived from the dis-posal of assets in fiscal years 1998 to 2000 is not subject to the additional 10% retained earnings tax under Article 66-9 of the Income Tax Law. If the transfer to retained earnings of any part arising from the disposal of assets in or before fiscal year 1997 results in the ag-gregate of retained earnings up to fiscal year 1997 exceeding the limit defined in Article 76-1 of the Income Tax Law, shareholders will not be liable for personal income tax on the retained earnings.
If capital reserves arising from disposal of assets in fiscal 1998 to 2000, as referred to above, are transferred to retained earnings in accordance with the relevant provisions of the Business Accounting Law, when the profit-seeking enterprise subsequently makes a distribution of earnings, such transferred earnings should be included in the total re-tained earnings used as the basis for the cal-culation of the tax credit ratio in accordance with Article 66-6 of the Income Tax Law. When a profit-seeking enterprise distributes such transferred earnings, in accordance with the same article, it should calculate the amount of tax credit on the dividend payable to each shareholder, and attribute it to the individual shareholders. Such amounts should be han-dled in accordance with Article 66-4 Para-graph 1, Items 1, 3 and 4 of the same law.
