Amendment to Article 235 (Paragraphs 2, 3, and 4 were deleted) and addition of Article 235-1 of the Company Act (the same below) ("Amendment") were announced by the President on 20 May 2015.
Prior to the Amendment, in practice, a company's articles of incorporation ("AOI") generally provide a percentage to be distributed as "employee bonuses" according to Paragraph 2, Article 235. Pursuant to Articles 232 and 237, a company shall not distribute bonuses until it has cleared all taxes, made up cumulative losses for the previous years and set aside a 10% legal reserve. Under the Amendment, Paragraph 2, Article 235 has been deleted and Paragraph 1, Article 235-1 has been added, according to which a company's AOI shall provide a fixed amount or percentage of the actual profit for a year to be distributed as "employee remuneration". The reason for the Amendment stipulates that the recipients of bonuses shall be limited to shareholders and do not include employees, therefore, the payment to be made by a company to the employees should be “remuneration” rather than “bonuses”, namely, the nature of the payment to the employees has been changed from distribution of profits to deduction of expenses.
1. Calculation basis
According to the reason for the Amendment, “actual profit” refers to “profit before tax”, and employee remuneration will be calculated according to the fixed amount or percentage provided in the AOI. According to letter Jing-Shang-Zi No. 10402413890 dated 11 June 2015 issued by the Ministry of Economic Affairs ("MOEA Letter"), after the Amendment, a company shall deduct and set aside an amount equal to the cumulative losses (if any) from its profit before taxes before calculating employee remuneration. After deducting employee remuneration from profit before tax, the remaining profit shall be used to clear taxes, made up cumulative losses and set aside a 10% legal reserve before distributing dividends. The remaining amount may then be distributed as shareholder bonuses by a resolution adopted at the shareholders’ meeting.
2. Director and supervisor remuneration
According Paragraph 1, Article 196 and Article 227, the remuneration of directors and supervisors may be prescribed in the AOI. Prior to the Amendment, the calculation basis for director and supervisor remuneration is the same as that for employee bonuses, namely, a company with any surplus should first clear taxes, made up cumulative losses and set aside a 10% legal reserve before distributing director and supervisor remuneration. According to the MOEA Letter, after the Amendment, if a company's AIO provides director and supervisor remuneration, such remuneration shall be calculated on the same basis as employee remuneration, that is to say, a company shall deduct and set aside an amount equal to the cumulative losses (if any) from its profit before taxes and then calculate the remuneration for employees, directors and supervisors based on the fixed amount or percentage provided in its AOI.
3. Method for prescribing a "percentage"
According to the MOEA Letter, the percentage of employee remuneration in the AOI can be prescribed in any of the following three methods: a fixed percentage (e.g., 2%), a range of percentage (e.g., 2% to 10%), or a minimum percentage (e.g., “more than 2%” or “no less than 2%”).
4. Forms of remuneration
According to Paragraph 3, Article 235-1, employee remuneration may be made in the form of stocks or cash, which shall be determined by a resolution adopted by a majority vote at a board of directors meeting attended by two-thirds or more of the directors and be reported at a shareholders’ meeting. In addition, according to the MOEA Letter, employee remuneration shall be calculated once a year, but may be distributed to the employees in full in a single distribution or in installments at the company’s discretion.
5. Transition period
- After the Amendment, since the 2015 annual general shareholders' meeting of a company will be ratifying distribution of employee bonuses for year 2014, therefore such distribution shall be handled and calculated based on the AOI prior to the Amendment ("Current AOI").
- If a company amends its AOI based on the Amendment at its 2015 annual general shareholder's meeting, the employee remuneration for year 2015 shall be calculated and distributed in accordance with the amended AOI ("New AOI"). If a company amends its AOI at its 2016 annual general shareholder's meeting, given that this is an exceptional circumstance caused by the Amendment, the employee remuneration for year 2015 shall be calculated and distributed in accordance with the "New AOI". In practice, when a company convenes its 2016 annual general shareholder's meeting, the proposed amendment to the AOI shall be discussed and approved first, and the employee remuneration distribution for year 2015 shall then be calculated and discussed in accordance with the New AOI.
- According to the MOEA Letter, after the Amendment, the provisions regarding employee bonuses in the Current AOI will no longer be valid. A company will not be allowed to distribute employee bonuses according to the Current AOI if it fails to amend its AOI in accordance with above point (2). If a company fails to amend its AOI in accordance with the Amendment, the remuneration the employees would have been otherwise entitled to should be considered as damages suffered by the employees due to the company’s failure to amend the AOI, which is in violation of the law. As a result, the employees may claim compensation from the company for such damages through judicial remedies.
6. Impact on taxes
After the Amendment, if the amount/percentage for employee bonus and director/supervisor remuneration provided in the Current AOI and the same as the that for remuneration for employees, directors and supervisors provided in the New AOI, as a company shall first calculate and deduct remuneration for employees, directors and supervisors from profit before tax before clearing taxes, therefore, the company's taxable income will decrease accordingly after the Amendment.