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AMENDMENTS TO THE ENFORCEMENT RULES OF THE INCOME TAX ACT REGARDING INCOME FROM STRUCTURED FINANCIAL PRODUCT TRANSACTIONS
In order to stimulate the financial product market, Article 14-1 of the Income Tax Act was amended and promulgated on 22 April 2009. Starting from 1 January 2010, tax on the income that individuals generate from conducting structured product transactions with securities firms or banks will be levied separately, whereby individuals need not declare such income in their annual income tax returns. For individuals residing in Taiwan and those not residing in Taiwan, tax on said income will be withheld at source at 10% and 15% respectively. To provide further guidance on the matter, the Ministry of Finance published the amendments to the Enforcement Rules of the Income Tax Act (Rules) on 18 November 2009. The current Rules clearly define the structured financial products, and provide the method for calculating the taxable income that individuals generate from conducting structured product transactions with securities firms or banks.
According to the current Rules, a "structured product transaction" means a transaction of a combination of a fixed-income product and derivatives where securities firms or banks deal with their clients as contractual parties pursuant to relevant rules. With regard to the calculation of taxable income from structured product transactions, the provisions under the current Rules are basically in line with the 16 August 2006 ruling of the Ministry of Finance (Ref. No.: Tai-Tsai-Shui-09504525760). The income that an individual generates from conducting a structured product transaction should be calculated at the closing of the transaction by subtracting the costs and expenses from the revenue generated during the term of the contract. The phrase "closing of the transaction" refers to the date on which said contract is terminated or expires, while the phrase "revenue generated during the term of the contract" means the amount distributed before the closing of the transaction, early termination fees and balance at the closing. In addition, "costs and expenses" refer to the original investment and service charges.
If a profit-seeking enterprise with a fixed place of business in Taiwan deals in structured products, 10% of the income that it generates from such transactions should be withheld. Unlike individuals, the enterprise should declare such income in its annual tax return and pay tax thereon accordingly. However, actual costs and expenses can be recognized and the tax withheld can be deducted from its tax payable. For a profit-seeking enterprise without a fixed place of business in Taiwan, the income that is generated from structured product transactions should be withheld at 15%.