Newsletter
ASSUMPTION OF TAX INCENTIVES AFTER DEMERGER
For clarifying how an existing company or a newly incorporated company, which acquired assets through a demerger (spin-off) pursuant to the Enterprise Mergers and Acquisitions Act (EM&A Act), should (i) assume the tax incentives that the demerged company was entitled to but did not use or apply pursuant to Paragraph 1, Article 37 of the EM&A Act, and (ii) handle the temporary discrepancies in the accounts of the demerged company, arising from the different accounting treatments between financial accounting and income tax regulations, the Ministry of Finance set forth in its tax ruling dated 31 October 2007 the following principles:
．Assumption of investment tax credit for purchasing machineries and equipment (M&E)
1.Where the M&E had not been used, and that the investment tax credit for such M&E had not been applied by the demerged company, the existing or newly incorporated company may file, after the demerger, an application along with the documents bearing the name of the demerged company and evidencing the placing of orders or the delivery of the M&E, and any other related procurement documentation, with the competent authorities, and upon approval, duly enjoy such investment tax credit.
2.Where the demerged company was entitled to investment tax credit for such M&E, the existing or newly incorporated company may assume, after the demerger, the investment tax credit that the demerged company was entitled to but did not apply. The demerged company need not repay to the tax authorities the amount of income tax credit that it had applied.
．Assumption of five-year tax holiday and calculation of tax-exempt income
1.Both (i) the demerged company, and (ii) the existing or newly incorporated company after the demerger should calculate their respective tax-exempt income according to the Formula for Calculating Tax-exempt Income Pursuant to Article 8-1 of the Statute for Upgrading Industries before Amendment. The existing or newly incorporated company after the demerger should maintain separate accounting books for the operating segment spun off from the demerged company; calculate separately the sales volume, cost of sales and gross profit generated therefrom; allocate fair amount of operating expenses and non-operating gain or loss thereto; and calculate the amount of income and income tax payable attributable to such spun-off operation.
2.If the demerger took place during an accounting year, and when (i) the demerged company, and (ii) the existing or newly incorporated company after the demerger calculated their respective tax-exempt income according to the prescribed formula, they should each (i) calculate the ratio of the number of days for which its tax exemption is valid to the total number of days of a year, (ii) based on the sales volume during its tax-exemption period, calculate on a pro rata basis the sales volume for the full year; (iii) deduct therefrom the base-year sales volume of the demerged company; and (iv) calculate the tax-exempt income accordingly.
．Transfer of temporary discrepancies arising from different accounting treatments between financial accounting and income tax regulations
1.When a demerged company transferred to an existing or a newly incorporated company after the demerger the assets and liabilities of its spun off operation, those unrealized expenses or losses stated on the books and attributable to the spun off operation should be transferred to and assumed by the existing or newly incorporated company as well. Moreover, if the demerged company had adjusted and decreased such unrealized expenses or losses in its income tax return pursuant to Article 63 of the Tax Audit Rules, the existing or newly incorporated company after the demerger may duly declare such expenses or losses when it pays such expenses or realizes such losses in the future.
2.Where the sales transactions between the demerged company and its affiliates were deemed unrealized sales pursuant to financial accounting principles and were duly adjusted to increase the amount of sales revenue and cost of sales when filing previous income tax returns, the existing or newly incorporated company after the demerger may adjust to decrease the sales revenue and cost of sales when filing its income tax return for the year in which an affiliate of the demerged company subsequently sold the underlying goods to a non-related party.