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CALCULATING PROFIT OR LOSS FROM ASSETS SPUN OFF TO FORM WHOLLY-OWNED SUBSIDIARY
According to a year 2002 circular of the ROC Accounting Research and Development Foundation, the nature of a company's assignment of its business to an affiliate for the acquisition of shares issued by that affiliate is of a corporate restructuring. Accordingly, its accounting treatment should be the entry of the net amount, after deducting debts from the book value of the original assets, as the cost of acquiring the shares, and there should be no entry of any profit from the exchange. In addition, according to an interpretation issued by the Department of Commerce of the Ministry of Economic Affairs on 23 April 2002, when a company conducts a demerger and issues new shares, the accounting treatment of the assets of the operating division spun off from the company should be based on their book value. However, because Article 65 of the Income Tax Act provides that when a profit-seeking company is dissolved, merged, or assigned, the valuation of its assets should be based on their current value or on the actual transaction price, it has led to uncertainties over the determination of the transfer price of assets spun off from a company in calculating the profit or loss from their disposal.
To address such uncertainties, the Ministry of Finance stated in its tax ruling dated 3 October 2007 that, provided that there is no unlawful attempt to evade or reduce tax liability, the book value of the spun-off assets should be taken as the actual transaction price, and the basis for calculating the demerged company's profit or loss from the transfer of assets in assessing its corporate income tax liability.
The interpretation further states that if the assets spun off in a demerger include long-term offshore equity investments or onshore equity investments other than those prescribed under the Securities Transaction Tax Act (STTA), their book value at the time of the demerger, less the original cost of their acquisition, should be treated as property transaction income, and be subject to income tax accordingly. For any onshore equity investments as prescribed under the STTA, their book value at the time of the merger, less the original cost of their acquisition, should be treated as securities transaction income, and be included in calculating basic taxable income in determining whether any basic income tax is payable pursuant to the Income Basic Tax Act, also known as Alternative Minimum Tax Act.