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In November 2008, the Financial Supervisory Commission lifted the ban on the domestic securities firms' and banks' entering into derivative transactions (linked to securities issued by ROC companies) with overseas Chinese and foreign investors who did not register with the competent government authorities pursuant to the Regulations Governing Securities Investments by Overseas Chinese and Foreign Investors.
On 21 May 2012, the National Tax Administration in Taipei issued a letter to the Securities Association and the Bankers Association of the ROC explaining the taxation principles applicable to the income generated by the aforesaid unregistered foreign institutional investors ("Non-FINIs") from the derivative transactions (linked to securities issued by ROC companies and settled in foreign currency) entered into with domestic securities firms and banks. The key points of the letter are as follows:
1.
If the derivative transaction is settled in cash, the income generated therefrom should be categorized as "income from a property transaction".
2.
If the derivative transaction is linked to securities issued by ROC companies and entered into with a securities firm or a bank approved by ROC competent authorities, the income generated therefrom should be classified as "income from a transaction for property located in the ROC", and be considered ROC-sourced income (Subparagraph 7, Article 8 of the Income Tax Act).
3.
If the settlement is made in foreign currency, the income for ROC tax purposes should be calculated under the following two steps: determine the amount of income in the foreign currency on the closing date (i.e., the date of early termination or expiration of the transaction), and then on the same day, convert the income into New Taiwan dollars based on the foreign exchange rate on that day.
4.
For a Non-FINI that has no fixed place of business but has a business agent in the ROC, the business agent should file an income tax return and pay applicable tax on the aforesaid income on its behalf. For a Non-FINI with no fixed place of business or business agent in the ROC, the Non-FINI should file an income tax return and pay applicable tax on the aforesaid income or engage a tax agent approved by local tax authorities to file an income tax return and pay applicable tax on its behalf.
Still, when the underlying assets of the transaction are not securities issued by ROC companies or the transaction is conducted by offshore securities firms and banks, whether the income derived from the transaction should be deemed "income from a transaction for property located in the ROC" remains unanswered, which requires clarification by the competent authorities.
