Newsletter
INCOME TAX TREATMENT OF STOCK OPTIONS ISSUED TO OVERSEAS EMPLOYEES BY TAIWAN COMPANIES
In an interpretation dated 1 June 2005, the Min-istry of Finance stated that if an employee of an overseas subsidiary, branch office, or liaison office of an ROC company obtained and exer-cised an employee stock option issued by the ROC company, and the employee rendered ser-vices in the ROC during the period between the grant date and the vesting date of the stock option, then the employee's ROC-sourced income from exercising the option should be calculated by multiplying the difference between the then market value of the shares and the exercise price on the date of exercise, by the ratio of the number of days during the above period that the em-ployee was present within the ROC to the num-ber of days of the period, and subject to ROC income tax accordingly. If during the above pe-riod the employee did not render services in the ROC, ROC-sourced income would not be an issue.
If an employee of an overseas subsidiary, branch office, or liaison office acquired and exercised an employee stock option issued by an ROC com-pany, and overpaid tax because his ROC-sourced income was not calculated according to the above formula, he may apply for a tax refund within five years from the date of tax payment by submitting evidentiary documents.
The above interpretation corresponds to two previous interpretations issued by the MOF on 17 May 2005, which addressed the tax treatment for an employee of a foreign company who rendered services within the ROC, or an em-ployee of an ROC subsidiary, branch office, or liaison office of a foreign company, acquired and exercised an employee stock option issued by the foreign company.
The test behind these interpretations is to use the portion of the employee's time that is spent ren-dering services within the ROC as the basis for calculating his ROC-sourced remuneration for services. "Remuneration for services" means "remuneration for services rendered within the territory of the ROC," as referred to in Subpara-graph 3, Article 8 of the Income Tax Act, which defines "income from ROC sources." As defined in Article 14 of the Income Tax Act, such re-muneration for services falls under Category 10, "other income," and not Category 3, "income from salaries and wages."
In summary, the earlier interpretations addressed the exercise by Taiwan-based employees of em-ployee stock options issued by foreign compa-nies; while the following interpretation ad-dressed the issuance of employee stock options by Taiwanese companies to overseas employees. Taiwan-based employees include "personnel employed by a foreign company and sent to render services within the ROC" and "personnel of a foreign company's subsidiary, branch office, or liaison office within the ROC." Overseas employees, on the other hand, are personnel of a Taiwanese company's overseas subsidiary, branch office, or liaison office. The scenario where "personnel employed by an ROC com-pany and sent to render services in another country" is not included in any of the interpreta-tions, but in theory such a personnel's ROC-sourced income should be calculated based on the number of days spent working within the ROC.