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EXCESS VALUE OF DISSOLVED SUBSIDIARY IS LIQUIDATION DIVIDEND
On 10 April 2007, the Ministry of Finance (MOF) issued an interpretation to clarify certain tax is-sues concerning the merger of a parent company with its wholly-owned subsidiary. The MOF stated that in such a merger, because the surviv-ing parent company would assume all the assets and liabilities of the dissolved subsidiary, thus if the net book value of the dissolved subsidiary's assets exceeds the capital that the parent com-pany had contributed to the subsidiary, the ex-cess should be treated as residual assets as if the subsidiary had been liquidated and should therefore be distributed to its shareholders. Hence such excess should be treated as the sub-sidiary's distribution of dividends to the parent company, and be subject to income tax accord-ingly. In addition, the record date of the merger should be taken as the dividend distribution date in calculating each shareholder's Imputed Tax Credit which should be distributed along with the dividend income.
The amount of the aforementioned dividend in-come attributable to the business income of the subsidiary from the year of the merger, or to the undistributed earnings of the year preceding the year of merger, can be respectively declared as a deductible item in calculating the undistributed earrings of the subsidiary for each of those two years.