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In a ruling dated 17 June 2004, the Ministry of Finance (MOF) stated that tax liability arising from a transfer or cancellation of treasury stock bought back by a company under the provisions of the Company Act may be handled according to an MOF ruling dated 4 December 2003.
The December 2003 ruling defines the tax treatment of a transfer or cancellation of treasury stock purchased under Article 28-2 of the Secu-rities and Exchange Act by a company listed on the Taiwan Stock Exchange or the over-the-counter market of the GreTai Securities Market (GTSM). The June 2004 ruling states that the same treatment should apply to treasury stock purchased under the provisions of the Company Act by an unlisted company as well. The main points are as follows:
A transfer or cancellation of treasury stock is a securities transaction. However, under inter-pretations issued by the Ministry of Economic Affairs on 14 March 2002 and 9 January 2003, any premium derived from such transaction will be treated as premium on shares issued above par value under Article 241 of the Company Act, and as such is exempt from income tax under Article 19 of the Industrial Upgrading Act.
Premium from treasury stock transactions classified as capital reserve, or loss arising from such transaction is not included in the calculation of undistributed retained earnings under Article 66-9 Paragraph 2 of the Income Tax Act. However, if such losses are offset first against capital reserve derived from transactions involving the same type of treas-ury stock, and then against retained earnings (in accordance with Sections 10 and 13 of Statement of Financial Accounting Standards No. 30), any portion of the loss that is offset against after-tax profit of the then current year may be deducted from the undistributed re-tained earnings calculated in accordance with Article 66-9 of the Income Tax Act.
Beginning from 17 June 2004, if losses arising out of treasury stock transactions are offset against retained earnings as described above, and those retained earnings include those ac-cumulated from fiscal year 1998 or subse-quent years, the tax credit associated with the amount offset should be deducted from the shareholders' imputed tax credit account for the year concerned, in accordance with Article 66-4 Paragraph 1 Subparagraph 5 of the In-come Tax Act, on the date of the transfer on cancellation of treasury stock. The formula for calculating the amount to be deducted is as follows:
Tax credit to be deducted = amount of undis-tributed retained earnings offset × tax credit rate in force on the date of transfer or cancel-lation.
In the above formula, "tax credit rate" means the rate as calculated under Article 66-6 of the Income Tax Act; if the rate so calculated ex-ceeds the applicable maximum tax credit rate, the maximum rate should be used instead.
