Newsletter
NEW RULES FOR TAXATION OF QFIIS' FORWARD FOREIGN EXCHANGE TRANSACTIONS
In an interpretation dated 1 November 2001, the Ministry of Finance (MOF) stated that when a Qualified Foreign Institutional Investor (QFII) engages itself in a forward foreign exchange transaction with a bank, earnings that the QFII receives at settlement of the contract upon ma-turity or renewal fall into the category of "any other income generated within the territory of the Republic of China" (Item 11, Article 8 of Income Tax Law), and as such, are subject to income tax. On this basis, since 1 November 2001, when making settlement payments upon renewal of forward foreign exchange contracts to QFIIs without a permanent place of business or busi-ness agent in the ROC, banks have withheld in-come tax at the rate of 20% in accordance with Item 9, Article 3 of the standards of Withholding Tax Rates for Various Incomes.
However, in consideration of the fact that when QFIIs generate earnings from forward foreign exchange transactions, their principals may be reduced due to exchange losses, in the interests of fair taxation, the MOF issued a further inter-pretation supplementing the above interpretation on 18 April 2003. In the supplementary inter-pretation, the MOF states that when QFIIs con-duct risk-hedging forward foreign exchange transactions, they may calculate profits and losses arising from the renewal of contract in accordance with the MOF's November 2001 in-terpretation (i.e., profits and losses from forward foreign exchange transactions are calculated separately), or alternatively, QFIIs may opt to calculate the profits and losses from forward foreign exchange transactions in combination with the foreign exchange profit and loss resulted from the principal as the basis for calculating income tax in accordance with the relevant pro-visions.
The computation method used need not be re-ported to the tax collection authorities for prior approval, but needs to be stated in an explanatory note at the time of filing. Once a particular computation method has been chosen, it may not be changed. A QFII without a permanent place of business or business agent in the ROC may, in accordance with the Regulations Governing In-vestment in Securities by Overseas Chinese and Foreign Nationals, have its Taiwan agent or representative calculate its profit or loss for the year as a whole and pay tax at 20%.