In order to curb elevated property prices in Taiwan, the Legislature has passed amendments to the Income Tax Act imposing a capital gains tax of up to 45 percent on profits made on the sale of property. Once the new capital gains tax takes effect on January 1, 2016, a portion of the Specifically Selected Goods and Services Tax Act ("Luxury Tax Act"), which imposed the so called "luxury tax" on the sale of houses and land will be abolished. However, these amendments may affect the foreign investment of real property in Taiwan as much as they affect the decisions of domestic home buyers and investors to purchase or sell property.
The following are some notable takeaways:
1. Effective Date.
The amendments to the Income Tax Act will apply to: (1) all properties purchased after January 1, 2016; and (2) property purchased on or after January 2, 2014 and held for no more than two years at the time of sale after January 1, 2016.
2. Change in the Basis of Capital Gains Tax.
Capital gains taxes will be calculated on the basis of the real market value (actual transaction price) of the housing and land instead of the current practice of separately calculating housing and land according to government-assessed property values, which can often greatly undervalue the property.
3. The New Tax Rates for Individual Owners.
Beginning the effective date (January 1, 2016), and subject to certain exemptions, owners who are natural persons ("Individual Owners") and sell their property within 1 year of purchase will be subject to a 45 percent capital gains tax. Individual Owners who sell their property after 1 year of purchase will be subject to a 35 percent tax. For Individual Owners resident in Taiwan, the tax rate falls to 20 percent if a property is sold between 2 and 10 years of ownership, and falls further to 15 percent if they hold their properties for more than 10 years.
4. End of the Luxury Tax on Real Property.
The portion regarding sales of houses and land in the Luxury Tax Act, which enacts a tax of 15 percent on the sales price of an owner's second property that is sold within 1 year of purchase and a tax of 10 percent if sold between 1 and 2 years of purchase, will be abolished.
5. Effect on Domestic Companies.
For Taiwan companies, proceeds from the sale of property of Taiwan companies will be deemed as part of the corporate income and continue to be subject to a 17 percent corporate income tax.
6. Effect on Foreign Companies with Property in Taiwan.
For foreign headquartered companies with a Taiwan presence, whether as a foreign branch or a registered office, their rates of capital gains tax will be subject to the amendments in the Income Tax Act of a 45 percent tax for sales within 1 year, and a flat 35 percent tax for sales of property held longer than 1 year. The rate also applies to a direct or indirect share transfer transaction by such foreign companies with holdings in buildings and land in Taiwan exceeding 50% of its equity value.
These amendments should affect the strategies of foreign companies that invest or plan to invest in real estate development in Taiwan. The Luxury Tax Act provided a luxury tax exemption for developers (including foreign companies) for first time ownership transfers of their completed buildings to customers. However, the newly approved capital gains tax scheme does not provide the same exemption and further impose higher tax rates (35 percent to 45 percent) on foreign companies compared to that on domestic companies (17 percent), which aims to achieve the government's aim of to deter foreign investors from propping up property prices. As a result, foreign developers will have to carefully plan and structure their investments and development projects in Taiwan to cope with the implications of the amendment.