Executive summary
The Taiwan Legislative Yuan passed1 an amendment to the current capital gains tax law in respect of the transfer of real property (New Law). The New Law is effective from 1 July 2021 and specifically applies to the transfer of real property acquired on or after 1 January 2016. The pre-amendment capital gains tax law applies to transfers of real property acquired before 1 January 2016. Under the New Law, the tax rates for capital gains derived from the transfer of real property have been increased and capital gains tax on indirect share transfers (where the transferred shares are “real property rich”) has been introduced.
This Tax Alert summarizes the key changes introduced by the New Law.
Detailed discussion
The New Law revised the current capital gains tax law in respect of the transfer of real property by: (1) increasing the progressive tax rates; (2) extending the taxing scope; and (3) reducing deductions when computing capital gains.
Increase in progressive tax rates
The capital gains tax on the transfer of real property situated in Taiwan is taxed at progressive rates subject to different holding periods as outlined below.
For companies
| Residency status | Pre-amendment | Post-amendment | ||
| Real property holding period | Tax rate | Real property holding period | Tax rate | |
| Resident company | No holding period | 20% | Less than 2 years | 45% |
| 2-5 years | 35% | |||
| More than 5 years | 20% | |||
| Nonresident company | Less than 1 year | 45% | Less than 2 years | 45% |
| More than 1 year | 35% | More than 2 years | 35% | |
For individuals
| Residency status | Pre-amendment | Post-amendment | ||
| Real property holding period | Tax rate | Real property holding period | Tax rate | |
| Resident individual | Less than 1 year | 45% | Less than 2 years | 45% |
| 1-2 years | 35% | 2-5 years | 35% | |
| 2-10 years | 20% | 5-10 years | 20% | |
| More than 10 years | 15% | More than 10 years | 15% | |
| Nonresident individual | Less than 1 year | 45% | Less than 2 years | 45% |
| More than 1 year | 35% | More than 2 years | 35% | |
Extension of taxing scope
Transfers of pre-sold condominium/homes
Under the New Law, transfers of pre-sold condominiums/homes (either with or without land) by companies are treated as the transfer of real property and capital gains derived thereon are subject to the progressive rates listed above (prior to the New Law, such transfer was not a taxable event). Relevant costs for acquiring the pre-sold condominium/homes can be deducted from the transaction amount when calculating the capital gains tax amount.
Indirect share transfers
Prior to the New Law, gains derived from the transfer of a foreign company’s shares would be subject to capital gains tax on the transfer of real property if the value of shares being transferred substantially comprised Taiwanese real property (i.e., where more than 50% of the value of the shares or share capital of the company in question comprised Taiwanese real property, the shares were “real property rich”). Such gain derived from the transfer would be reclassified as capital gains from the transfer of real property rather than as a transfer of qualified securities and the progressive tax rates would apply. Based on additional guidance published on 30 June 2021, the value of the shares and share capital is determined based on the net asset value from the financial statements of the company.
Under the New Law, if the shares are “real property rich,” regardless of whether the shares are of a foreign company or a Taiwanese company, the gain derived thereon would be reclassified as capital gains on the transfer of real property and the progressive rates under the New Law would apply from 1 July 2021. That is, the New Law also applies to the indirect transfer of foreign or Taiwanese shares as a result of a transfer of a foreign company’s shares, as long as the shares being transferred are property rich.
Under the New Law, the calculation of the “real property rich” threshold may be different from the calculation under an applicable tax treaty. Instead of using net asset value from financial statements to determine the company’s value, tax treaties usually use total asset value without taking into account debts or other liabilities when determining whether a company’s shares are “real property rich” and thus a further analysis would be required when the taxpayer’s resident country has a tax treaty with Taiwan.
Reduced deductions when computing capital gains
The incremental value under the “land value incremental tax,” based on government-appraised prices, could be deducted when computing capital gains under the pre-amendment law. However, under the New Law, the incremental value permitted to be deducted is limited to the amount accruing since the last transfer of the real property instead of the total incremental amount since the construction of the real property was completed.
Implications
Multinational enterprises with real property situated in Taiwan should consider the impact of the New Law on any potential transfers of real property, including any restructuring.
For additional information with respect to this Alert, please contact:
Ernst & Young (Taiwan), Taipei
- Yishian Lin
- Sophie Chou
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
- Chris Finnerty
- Bee-Khun Yap
- Dhara Sampat
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
