Newsletter
TAX RULES FOR PENSION PAYMENTS
In an interpretation dated 23 March 2005, the Ministry of Finance stated that when the em-ployee's years of service retained from the old pension system under the Labor Standards Act are cashed out under the provisions of the new Labor Pensions Act (LPA), such cashed-out payment should be deemed as the "separation income" as referred to in Article 14 Paragraph 1 Category 9 of the Income Tax Act, and subject to income tax after applying the fixed tax allow-ances for that income category. Thus, any amount up to NT$156,000 multiplied by the number of service years is tax free; one half of any amount between NT$156,000 and NT$312,000 multiplied by the number of service years is tax free; and any amount exceeding NT$312,000 multiplied by the number of service years is to be treated as fully taxable income.
However, if a worker transfers the whole of the cashed-out payment into his Individual Pension Account (IPA) with the Bureau of Labor Insur-ance under the LPA, as such worker does not yet qualify to draw a pension under the new LPA pension system, the issue of taxation does not yet arise. At such future time as the worker receives a lump-sum retirement payment or a monthly pension under the LPA system, these will be subject to income tax after applying the tax al-lowances for separation income under the In-come Tax Act. The number of service years will then be based on the actual number of years in which contributions are made under the new system, plus the number of years carried over from the old system.
The new pension system allows a worker to make voluntary contributions of up to 6% of monthly salary into his IPA, in addition to the contributions payable by the employer. Under the current provisions of the Income Tax Act, when the worker comes to draw a lump-sum retirement payment or pension derived from these voluntary contributions, such payments will be entirely tax free. However, the MOF has stated that it intends to propose amendments to the Income Tax Act, to make this portion also taxable as separation income.