Newsletter
CLARIFICATION ON APPRO-PRIATIONS TO LEGAL RESERVE
In an interpretation dated 29 August 2000, the MOEA responded to an inquiry from the Minis-try of Finance (MOF) concerning companies' appropriations to their legal reserve. According to the MOEA interpretation, although Article 237 Paragraph 1 of the Company Law requires a company to set aside 10% of its surplus as legal reserve before distributing any dividend, distri-bution of dividend is not a precondition for such an appropriation to reserve. Thus it is not unlawful for a company to make an allocation to its legal reserve when a shareholders' meeting has resolved not to distribute the company surplus.
Based on the above explanation from the MOEA, on 26 September 2000 the MOF itself issued an interpretation concerning Article 66-9 Paragraph 2 Item 4 of the Income Tax Law. The MOF stated that where a profit-seeking enterprise does not distribute its surplus in a particular year, any part of that year's surplus appropriated to its legal reserve in accordance with the provisions of the Company Law is deductible from the company's undistributed surplus in accordance with Article 66-9 Paragraph 2 Item 4 of the Income Tax Law.
Further, regarding the provision of Article 66-9 Paragraph 1 of the Income Tax Law that the un-distributed surplus of a profit-seeking enterprise is subject to corporate income tax at a rate of 10%, the basis for calculation is the surplus in the individual tax year. Only when an enterprise distributes surplus accumulated in previous years, and the surplus is appropriated to legal reserve on the basis of the actual amount distributed, the part not derived from the current year's surplus is not deductible under Article 66-9 Paragraph 2 Item 4 when calculating the amount of undis-tributed surplus.