ALLOCATION OF EXPENSES TO TAX-EXEMPT INVESTMENT IN-COME

11/01/2003

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Under Article 42 of the Income Tax Act, the investment income received by a company from its investment in another enterprise within the ROC shall not be subject to the ROC income tax. In a ruling dated 29 August 2003, the Ministry of Finance (MOF) stated that the operating ex-penses and interest payments of a company must be offset against such investment income and may not be deducted from the company's taxable income. The amounts to be allocated to invest-ment income shall be calculated according to the following provisions:

Ÿ An enterprise that does not specialize in secu-rities trading need not allocate any of its gen-eral operating expenses or interest payment to its investment income except for those ex-penses and interest payments that are directly associated with such investment.

Ÿ For an enterprise specializing in securities trading, operating expenses and interest pay-ments that can reasonably and clearly be di-rectly attributed to specific investments shall be separately accounted for. Other operating expenses and interest payments shall be allo-cated in the proportions defined by the MOF in its ruling dated 8 February 1994. That is to say, the proportion of investment income to the total income of the company (comprising gains from the sale of securities, investment income, bond interest income and other oper-ating income.)

Ÿ For integrated securities firms or bills finance companies, the operating expenses and inter-est payments that can reasonably and clearly be directly attributed to specific investment shall be separately accounted for. Other op-erating expenses and interest payments shall be allocated in accordance with the principles set forth by the MOF in its letter dated 9 Au-gust 1996 for the allocation of operating ex-penses and interest payments by integrated securities firms and bills finance companies that engage in securities trading during the period in which gains from securities transac-tions are exempted from income tax. As such, an integrated securities firm may choose to allocate its operating expenses on the basis of salaries, number of employees, or office floor area of each department.

For the interest payments, the firm may take the net balance of the interest payments over interest income, and allocate on the basis of the proportion of the fund that were used to generate the investment income to the total usable fund of the company.

For a bills finance company, the proportion of its operating expenses allocated to investment income shall be calculated by using the ratio of its investment income to the total income of the company (comprising assessed investment income, gains from the sale of bonds and bills, bond interest income and its other operating revenues). For its interest payments, the firm may take the net balance of the interest pay-ments over interest income, and allocate on the basis of the proportion of the fund that were used to generate the investment income to the total usable fund of the company.