Newsletter
Taxation on Capitalization of Investment in the Form of Patent Rights, Know-hows and Technology
The Legislative Yuan (i.e. the Parliament) recently passed the amendment bill of the Statute for Upgrading Industries ("SUI") whereby Articles 19-2 and 19-3 provide the taxation criteria for the capitalization of investment in the forms of patent rights, know-hows, and technology. Attention must be paid to the difference between these provisions and the ruling issued by the Ministry of Finance ("MOF") on 1 October 2003 confirming the taxability of capitalization of investment in the form of incorporeal assets ("Ruling").
Pursuant to Article 19-2 of the SUI, retroactively from 1 January 2004, if the capitalization of investment in the form of "patent rights" or "know-hows and technology" is deemed by the Ministry of Economic Affairs ("MOEA") to have met the requirements that (i) the invested company is a newly emerging industry and the patents or know-hows and technology thus acquired will be used by itself, and (ii) the shares from the capitalization represent 20% of the total issued and outstanding shares of the company after the capitalization and the shareholders of the same capitalization do not exceed five persons, the tax thereon may be deferred for five years or paid upon transfer of the shares within five years.
Article 19-3 provides that retroactively from 1 January 2004, if stock option certificates are issued to those who contribute to the capital in the form of patent rights or know-hows and technology pursuant to a resolution adopted by 1/2 of the directors at a board meeting representing 2/3 of the total number of the directors, the tax thereon may be paid when the options are exercised. As the period for the exercise may be longer or shorter than five years and the holders may not exercise the options due to valuelessness of the shares, the tax may be paid earlier or later than five years; it is also possible that no tax will be paid if the holders choose not to exercise their options.
These two new articles reflect some adjustment of the MOF's position. Namely, as expressed in the Ruling, the MOF used to hold that "when the shares are subscribed, the capital gain is realized and thus should be taxable". With the new articles in place, when the shares are subscribed, the capital gain should be recognized but not taxable. In addition, in case of stock option certificates as a result of capital contribution, no income is recognized from the acquisition of the certificates. Only when the options are exercised will the capital gain be recognized as realized and be taxable.
Please note the following:
1. The new provisions only apply to the capitalization of investment in the form of "patent rights" or "know-hows and technology", while the Ruling applies to all incorporeal assets including trademarks and goodwill.
2. "A newly emerging company" does not refer to one of the " newly emerging, important and strategic industry" under Articles 8 and 9 of the SUI. Relevant rules must be further promulgated by the MOEA after discussion and consultation with other competent government authorities.
3. Any capitalization of investment in the form of incorporeal assets, which does not meet the criteria prescribed above, shall comply with the Ruling and be subject to income tax in the year of said capitalization.