Newsletter
MOF CLARIFIES TAX TREAT-MENT OF OVERSEAS-ISSUED EMPLOYEE STOCK OPTIONS
In 2004, the Ministry of Finance (MOF) issued a legal interpretation setting out tax provisions related to the issuance of employee stock options by Taiwanese companies. On 17 May 2005, the MOF issued two more interpretations to clarify its position on the relevant tax treatment.
Employees may acquire overseas-issued em-ployee stock options as part of the incentive system of a multinational enterprise. Accord-ingly, the taxation issues that may arise in con-nection with such stock options must be exam-ined from the three perspectives of the employee working in Taiwan, the local entity (which may be a subsidiary, branch office, or liaison office), and the foreign company that issues the stock options.
Employees working in Taiwan may be divided into those employed by the local entity, and those employed by the foreign company and dispatched to Taiwan. In either case, that part of an employee’s income from stock options that is associated with his rendering services in Taiwan is subject to ROC income tax. An employee’s total income from a stock option is calculated by taking the difference between the market price of the shares on the exercise date exceeding the exercise price. The proportion of this income that is to be treated as ROC income is calculated pro rata to the number of days that the employee rendering services in Taiwan between the grant date (the date on which the stock option is granted) and the vesting date (the date from which the stock option may be exercised).
Although this income is associated with the em-ployee’s provision of services, the source of the income is the foreign company, and not the local entity to which the employee renders his services. Thus under Article 14 (categories of personal income) of the Income Tax Act, such income cannot be said to be “income from salary and wages” (Category 3), and the MOF has deter-mined that it should be treated as “other income” (Category 10).
When an employee who is deemed ROC-resident for tax purpose receives “other income” from a local entity, the local entity is not obliged under the Income Tax Act to withhold tax at the source. The payer of income from an overseas-issued employee stock option is gener-ally the foreign company rather than the local entity. Thus, regardless of whether the local en-tity contributes to the cost of issuing such stock options, it should not normally be under a duty to issue a non-withholding tax statement in respect of such income. However, in order to effectively track this source of revenue, the MOF has de-termined that in these circumstances the local entity is deemed to have a constructive payment relationship with the income recipient, and therefore must issue a non-withholding tax statement.
If the local entity bears part of the cost of the foreign company’s issuing of employee stock options, then regardless of whether an employee recipient is deemed ROC-resident or not, the MOF requires the local entity to issue a non-withholding tax statement. If such income had been paid out within the statute of limitation of past five years, the local entity should issue such statement within three months after the date of the MOF’s interpretations; and the employees who had exercised such stock options should make a supplementary income tax filing, and pay any tax due, within four months. An exception to this is where the local entity did not share the cost and the employee has already exercised the stock option. In this case the local entity need not issue a non-withholding tax statement, and the employee need not make a supplementary filing or pay any additional tax.
If overseas-issued employee stock options are not directly issued to employees working in Taiwan by the foreign company but instead the local entity issues such stock options to em-ployees as part of their employment remunera-tion, then the local entity may declare the amount as expenditure on wages and salaries in the year in which the employee exercises the stock option. This provision is very different from the provi-sions on employee stock options issued by a purely local company, as addressed in the MOF’s 2004 interpretations. When a purely local company issues employee stock options to its employees, the relevant cost may be declared as wages and salaries expenditure in the year of issuance. If for any reason the employee does not later exercise the stock option, the relevant amount should then be redeclared as “other in-come” of the company.
The final scenario to consider is that of an em-ployee of a foreign company who is dispatched to Taiwan to provide services to the local entity, and acquires a stock option issued by the foreign company. The local entity may calculate its costs associated with the stock option in the year in which the employee exercises the stock option, and declare them in the appropriate expenditure category in accordance with its legal relationship with the foreign company, such as technical services or marketing. At the time of payment the local entity should also withhold tax in ac-cordance with the relevant provisions.