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QUASI-DIVIDEND INCOME FROM MERGER IS NOT TAX-EXEMPT SALES REVENUE
In order to simplify tax filing and payment procedures, in an order dated 8 July 1988 the Ministry of Finance (MOF) stated that when a business that engages in investment business as a secondary activity, receives share dividend income during the course of an accounting year, such income need not be declared in the business's bimonthly (or monthly) business tax return as tax-exempt sales for the relevant period. Instead, after the end of the accounting year, the share dividend income for the entire year can be declared as tax-exempt sales for the final bimonthly period of the year. This is then taken as the basis for calculating the amount of business tax payable or overpaid, and for calculating the amount of tax adjustment based on the non-deductible ratio for the year concerned, as calculated according to the Regulations for the Computation of Business Tax for Dual-Status Business Entities. The amount of tax due should be paid at the time of filing.
In a further interpretation dated 22 May 1989, the MOF defined the scope of such share dividend income as comprising two components: cash dividends, and stock dividends (i.e., bonus issues from increases in capital by conversion of retained earnings). But the ruling also stated that a rights issues from an increase in capital by conversion of capital reserve, is an adjustment under the accounting title "net capital," and need not be declared as tax-exempt sales.
However, there has been doubt over the status of the quasi-dividend income received by a parent company when it merges with its 100%-owned subsidiary, thus acquiring the subsidiary's assets. Should the amount by which the net assets of the absorbed subsidiary exceed the surviving parent company's capital contribution to the subsidiary, be included in the tax-exempt sales declared for the final period of the accounting year, in order to calculate the proportion of input tax that cannot be offset against taxes on taxable sales for the year in question?
In an interpretation issued on 19 June 2008, the MOF stated that when a company merges with its 100%-owned subsidiary, the amount by which the net assets acquired from the absorbed subsidiary at the time of the merger exceed the parent company's capital contribution to the absorbed subsidiary, need not be included in the surviving parent company's tax-free sales for the final period of the accounting year, that are used to calculate the non-deductible proportion of input tax and the tax adjustment for the year in question.