On January 18, 2018, the Legislative Yuan approved the Amendments to the Income Tax Act ("Amendments") submitted by the Ministry of Finance. After the Amendments are announced by the president, they will be effective starting from January 1, 2018 and are a step forward for Taiwan's tax system to be more in line with global tax developments and to be more competitive, equitable and reasonable. The major changes to the tax system are as follows:

A.Individual Income Tax

1.The Amendments will increase the standard deduction (from NT$90,000 to NT$120,000), the special deductions for salary/wages and the disability allowance (each from NT$128,000 to NT$200,000), and the special deduction for pre-school children (from NT$25,000 per child to NT$120,000 per child), in an effort to reduce the income tax liability of wage earners, mid/low-income earners, and parents with young children.

2.Hoping to help companies attract and retain high-level talent, the Amendments will abolish the highest tax rate bracket, thus decreasing the highest tax rate bracket from 45% to 40% and reducing the income tax liability of individuals with more than NT$10 million of net taxable income.

3.Under the new tax system, the income earned by sole proprietorships and partnerships will be passed through to the sole proprietor or each partner and subject to individual income tax. As corporate income tax will no longer be levied on such income, the Amendments will reduce the corporate income tax liability of sole proprietorships and partnerships.

B.Corporate Income Tax

The corporate income tax rate will increase from 17% to 20% and the surtax on undistributed earnings will decrease from 10% to 5% under the Amendments. However, the corporate income tax rate for corporations with less than NT$500,000 of taxable income will increase gradually over a three year period (the tax rate will be 18% in 2018, 19% in 2019, and 20% in 2020).

C.Taxation of Dividends Income

1.The Amendments will abolish the imputation tax system and imputed credit account with the aim of simplifying income taxation in respect of dividends.

2. The Amendments will increase the dividends withholding tax rate from 20% to 21% for foreign investors. Furthermore, foreign investors will no longer be allowed to apply 50% of the surtax paid by the company as a tax credit against his/her dividends withholding tax. However, if the investor's home country and Taiwan have entered into a tax treaty with a preferential dividends withholding tax rate, the investor may continue to apply such preferential tax rate (Taiwan has entered into tax treaties with 32 countries).

3. To promote a fairer tax system and to reduce the difference in tax liability that exists between resident individual investors and foreign investors, the Amendments will launch a new tax regime in respect of resident individual investors' dividends income. Under the new regime, there are two options for taxing dividends income that a resident individual investor may choose from:

(1)Under Option 1, an investor's dividends income is combined into his/her gross income and the investor can apply 8.5% of the dividends income as a tax credit against his/her income tax liability. However, such dividends tax credit is limited to NT$80,000 for each household. An investor is entitled to a tax refund if the amount of the dividends tax credit is greater than his/her income tax liability. Option 1 would likely be preferential for investors with individual income tax rates that are lower than 20%.

(2)Option 2 applies a flat 28% tax rate on dividends income and would likely be preferential for investors with individual income tax rates that are higher than 30%.