According to the Company Act of Republic of China (Taiwan), a shareholder may contribute technology required by a company in lieu of capital payment. Therefore, obtaining shares by reason of technology contribution in lieu of capital payment (“Shares by Technology Contribution”) is allowed under Taiwan law. However, the relevant taxation requirement is also one of the important factors determining whether a shareholder is willing to do so. The recent amendment to the Act for Development of Small and Medium Enterprises (“Act”) to allow a small and medium enterprise (“SME”) or an individual to defer paying income tax for Shares by Technology Contribution, is expected to provide a strong incentive for an individual or a SME to obtain Shares by Technology Contribution.
The Statute for Upgrading Industries used to provide a similar tax incentive for obtaining Shares by Technology Contribution. However, after such tax incentive expired from the end of 2009, the biotech and new pharmaceuticals industry is the only industry in which payment of income tax on Shares by Technology Contribution may be deferred, according to Article 7 of the Act for the Development of Biotech and New Pharmaceuticals Industry.
As to industries other than biotech and new pharmaceuticals industry, according to a ruling issued by the Ministry of Finance (“MOF”) on October 1, 2003, a shareholder who obtains Shares by Technology Contribution shall immediately pay income tax on the amount which exceeds the cost and expense of obtaining the technology. Such ruling requires the shareholder obtaining Shares by Technology Contribution to pay income tax when there is no real cash inflow, and to face the risk that the actual income upon disposal of such shares may be lower than the capital payment in lieu thereof. Thus, many technology owners hesitate when they decide whether to adopt the mechanism of obtaining Shares by Technology Contribution.
To facilitate the circulation and application of achievements of innovation and research and development, the Act, amended and promulgated on June 4, 2014, adds a tax incentive for a SME or an individual, allowing such SME or individual to defer payment of income tax on Shares by Technology Contribution. For the 10 years starting from May 20, 2014, when a SME or an individual transfers intellectual property rights to a non-public company in exchange for the company’s newly issued shares in lieu of capital payment, the income tax on such shares is levied only when such shares are re-transferred, given or distributed as part of a bequest.
According to the definition of the Standards for Identifying Small and Medium Enterprises, in general a SME means an enterprise in the manufacturing, construction, mining or quarrying industries with share capital of NT$80 million or less, or an enterprise in an industry other than the above with sales revenue of NT$100 million or less in the immediately preceding year. Moreover, the competent authorities may identify a SME by the number of regular employees. For the manufacturing, construction, mining or quarrying industries, the threshold number of regular employees shall be less than 200. For industries other than the above, the threshold number of regular employees shall be less than 100.
Although the above amendment allowing the deferral of payment of income tax for Shares by Technology Contribution is only applicable when a SME or individual obtains a non-public company’s shares by contributing the intellectual properties of their own, it is still an important breakthrough, especially given the MOF’s generally conservative attitude towards such tax incentives in recent years. For non-public companies, it also provides an opportunity to introduce innovative technology and recruit valuable employees to increase their competitiveness by issuing Shares by Technology Contribution.