Newsletter
DEFERRED PAYMENT OF LAND VALUE INCREMENT TAX ON MERGER
On 11 October 2005, the Ministry of Finance (MOF) issued an interpretation on the criteria for determining "consideration" and "at least 65% of total consideration," as referred to in Article 34 Paragraph 1 of the Corporate Mergers and Ac-quisitions Act (CMAA). Article 34 provides that when at least 65% of the total consideration given to an acquired company for its assets or shares is in the form of voting shares, the ac-quiring company may apply to have land value increment tax (LVIT) on transferred land calcu-lated and recorded, and its payment deferred un-til such time as the land is transferred to another party. The interpretation stated that calculation of the percentage should be based on the total price of the land transaction; it is not permissible to deduct from the land price any provision for payment of LVIT, capital surplus arising from revaluation of the land, mortgage debt, etc.
For example: Company A purchases from Company B land with a market value of NT$1 billion. According to the MOF ruling, to qualify for deferred payment of LVIT, Company A must transfer to Company B voting shares with a value of at least NT$650 million.
Suppose that Company A (the acquiring com-pany) assumes NT$900 million in debt by mortgaging the acquired land, so that it only has to pay the balance of NT$100 million to com-plete the acquisition. If this payment were made the basis for determining the amount of consid-eration, then Company A would need to transfer to Company B voting shares with a value of only NT$65 million to be entitled to defer payment of LVIT. Thus Company B would have received, in exchange for the transfer of land, NT$935 million in cash (including NT$900 million from the mortgage loan) and shares valued at only NT$65 million, yet Company A would be enti-tled to defer payment of LVIT. This would clearly be contrary to the legislative intent of the CMAA, and would also attract deliberate tax avoidance arrangements. Therefore the MOF took the view that the calculation of the consid-eration of which 65% is given in shares should be based on the total value of the land transaction.