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In order to provide an alternative incentive scheme for companies to encourage their employees to stay, public companies are permitted to issue restricted stocks in accordance with the Company Act. Restricted stocks refer to the shares newly issued by a public company ("Issuer") to its employees on the condition of fulfilling certain seniority or performance requirements. Before the requirements are fulfilled, the employees' rights in the stocks (such as stock transfer right, voting right, dividend right, right to dispose of dividend, and so on) may be subject to restrictions. Moreover, the Issuer may buy back or cancel the restricted stocks issued to an employee if the requirements have not been timely met.
On 11 July 2012, the Ministry of Finance (MOF) issued two tax directives concerning the tax treatment of restricted stocks. The key points are as follows:
1.
Issuer's salary expense: The Issuer, in declaring salary expense in the vesting period whereby the salary expense was calculated based on the fair market value of the restricted stocks on the grant date, may follow the MOF's tax directive dated 11 June 2008 on the tax treatment of employees stock options. This means that (i) such salary expense is tax deductible in each year of the vesting period; and (ii) if the Issuer buys back or cancels restricted stocks due to an employee's failure to fulfill prescribed requirement(s), the Issuer should report the amount of salary expense declared in the prior year(s) of the vesting period as "other income" in the year of such buy-back or cancellation.
2.
Employee's taxable income:
(1)
If the restriction is related to an employee's right to transfer restricted stocks, the company should treat the date on which the employee fulfilled the requirement(s) as the date on which the employee may dispose of the restricted stocks ("Disposable Date"), and calculate the excess of the market price of the restricted stocks on the Disposable Date over the subscription price (if applicable) as the employee's other income.
(2)
This tax directive does not explain the tax implications of imposing restrictions on other rights (such as voting right, dividend right, and so on), and is subject to the MOF's further clarification.
The date in " the date on which the employee fulfilled the requirements" refers to the date on which (i) the Taiwan Depository & Clearing Corporation (TDCC) removes the restriction on an employee's right to transfer restricted stocks from the employee's securities account (if the restricted stocks are deposited into the employee's account with the TDCC; or (ii) the trustee transfers the restricted stocks to the employee's securities account (if the restricted stocks are held in trust), which ever the case may be.
