Newsletter
HEADQUARTERS TAX INCEN-TIVES COME ON STREAM
The amendments to the Statute for Upgrading Industries enacted on 30 January 2002 added a new Chapter 6-1, "Operational Headquarters." In the new chapter, Article 70-1 provides that if a company establishes its operational headquarters in Taiwan, then income it receives from overseas affiliates in the form of income from manage-ment services or research and development, royalties, investment income, or gains from disposal of investments, can be exempted from business income tax. Meanwhile, Article 70-2 provides that if the site selected by a company to establish an operational headquarters is above a certain size, it may be designated a special ex-clusive zone by the relevant statutory procedures; if the land is state property, the managing agency may sell or lease it to the company at a prefer-ential price.
To provide detailed rules for the implementation of the above provisions, such as the minimum size of an operational headquarters, the scope of the provisions' application, and qualifying con-ditions, on 29 May 2002 the Executive Yuan, promulgated the Regulations for the Implemen-tation of Tax Incentives for Corporate Opera-tional Headquarters, which took effect immedi-ately. The regulations provide no direct defini-tion of the term "operational headquarters." One can therefore only infer the meaning from the relevant provisions. The main criteria are as follows:
Ÿ To qualify for the tax incentives, an opera-tional headquarters must meet the following conditions:
1. Employ at least 100 local employees, as a monthly average, of whom at least 50 must be at least college graduate.
2. Net annual sales revenue of at least NT$1 billion.
3. Annual operating expenditure of at least NT$50 million.
4. The scope of its operations includes overall operational activities for its various over-seas affiliates, such as operating strategy; intellectual property management; finan-cial management; international procure-ment; marketing; logistical support; human resources; R&D, design and engineering; or high-value-added production.
5. Its overseas affiliates must be established, registered and genuinely operating in at least two countries.
6. Its overseas affiliates' net annual sales revenue must total at least NT$100 million.
The calculation of net sales revenue under item (2) above must exclude inter-company transactions between the operational head-quarters and its affiliates. Under item (4), overall control of any one of the operational activities listed is sufficient. Under item (5), if the affiliates include an affiliate invested in mainland China, Hong Kong or Macao with the investment approval or recordation by the Ministry of Economic Affairs (MOEA), then in addition to the operation conducted in the mainland, Hong Kong or Macao, that affiliate must also be established and registered in an-other country.
Ÿ The definition of overseas affiliates applies the concept of substantive control or major in-fluence, which does not necessarily mean a controlling interest or shareholding. A ma-jority shareholding; mutual investments of at least one-third; holding a majority of direc-torships; having the same chairperson or CEO; sharing a majority of executive shareholders or directors; a majority shareholding or in-vestment being owned by the same share-holder; or even the operational headquarters having the right to direct the operations of the other enterprise under a joint venture agree-ment is each sufficient basis for the enterprise concerned to be regarded as an affiliate.
An entity that qualifies as an operational head-quarters according to the above conditions may, prior to the final date for filing its business in-come tax return, apply with the Industrial De-velopment Bureau, MOEA for the issuance of a letter certifying that the scope of its operations qualifies it as an operational headquarters. When filing its business income tax return, the entity can then apply for the tax incentives by submit-ting the certifying letter along with a statement of operational headquarters' tax incentives, that has been reviewed by a certified public accountant, and other relevant supporting documents. It should also be noted that costs related to the above tax-exempt income must be correctly differentiated and attributed. Costs that cannot be individually attributed should be apportioned on a reasonable basis. In other words, costs as-sociated with the tax-exempt income must be attributed to that income either directly or by apportioning, so that such cost cannot be de-ducted from the taxable portion of income. This will have the effect of increasing taxable income to some degree.