Teresa Huang and Oli Wong
On December 21, 2021, the Legislative Yuan adopted by three readings the Act for the Development of Biotech and Pharmaceutical Industry (hereinafter, the “Biotech Act”), which is mainly a revision of the provisions of the expired Act for the Development of Biotech and New Pharmaceuticals Industry to extend the tax incentives until December 31, 2031, in the hope of promoting the development of advanced medical and high technology threshold products and encouraging cross-domain cooperation among industries through tax incentives and other credits, so as to expand the scale of the biotech and pharmaceutical industry in Taiwan.
The highlights of the amendments to the Biotech Act primarily consist of the following seven items:
1. In addition to the new drugs and high-risk medical devices already included in the original act, new incentive items for new dosage forms, regenerative medicine, precision medicine, digital medicine, and innovative technology platforms dedicated to the biotech and pharmaceutical industries are also included. The category of biotech and pharmaceutical companies (hereinafter, the “Biotech Companies”) was expanded to include the companies conducting contract development and manufacturing business. (Article 4 of the Biotech Act)
2. Up to 25% of the research and development investment of the Biotech Companies that engage in research, development, and manufacturing may be deducted from the amount of profit-seeking enterprise income tax payable for each year within five years from the year in which the payable profit-seeking enterprise income tax is incurred with the annual deduction capped at 50% of the tax. (Article 5 of the Biotech Act)
3. For the brand new machinery, equipment, or systems invested and used by the Biotech Companies for production and manufacturing, if the expenditure in the same year ranges from NT$10 million to NT$1 billion, an option of deducting up to 5% of the expenditure incurred in that year or deducting 3% of the expenditure amount from the payable profit-seeking enterprise income tax within three years may be selected with the annual deduction capped at 30% of the payable income tax for that year. (Article 6 of the Biotech Act)
4. When profit-seeking enterprises have subscribed to the shares of the Biotech Companies and become a shareholder for three years, up to 20% of the price paid for the shares may be deducted from the payable profit-seeking enterprise income tax for each year within five years from the year a payable profit-seeking enterprise income tax is incurred with the annual deduction capped at 50% of the tax. (Article 7 of the Biotech Act)
5. For individuals who invest $1 million or more in the same Biotech Company not listed on the Taiwan Stock Exchange or the Taipei Exchange and have held the shares for three years, they may deduct up to 50% of the investment amount from their aggregate personal consolidated income tax within two years from the year when a three-year period for the holding of the shares expires. The total amount of the annual deduction is capped at NT$5 million per year. (Article 8 of the Biotech Act)
6. If the senior professional staff or technology investors of the Biotech Companies receive newly issued stock or stock options as a result of reward or due to technology invested as capital stock and have held shares or stock options, been employed, or provided technical services cumulatively for two years, they may choose to be taxed at the lower of the “transfer price” or the “current price or price at which the stock was acquired”. (Articles 9 and 10 of the Biotech Act)
7. Researchers of schools and institutions who are the main technology providers of the start-up Biotech Companies are exempted from the prohibitions against business operation and part-time employment and the restrictions on shareholding percentage under Article 34 of the Act Governing the Appointment of Educators and Articles 13 and 14 of the Civil Servants Work Act (Article 12 of the Biotech Act).
After the Biotech Act as the mother law was launched, the Ministry of Economic Affairs (hereinafter, the “MOEA”) and the Ministry of Finance went on to discuss all kinds of sub-laws and regulations. If biotech or pharmaceutical companies seek to become the Biotech Companies eligible for the tax incentives under the Biotech Act, they should apply to the MOEA for the Approval Letter for Biotech and Pharmaceutical Companies first. The MOEA accordingly pre-announced on June 15, 2022 the draft Regulations Governing the Approval of Biotech and Pharmaceutical Companies (hereinafter, the “Regulations”) to specifically provide for the approval criteria for the Biotech Companies, the required documents and procedures, the cancellation and revocation of approval, and other matters, as highlighted below:
1. Approval criteria (Article 2 of the Regulations):
The research, development, and manufacturing company and the contract development and manufacturing company should each meet the following approval criteria:
|Research, Development and Manufacturing Company||Contract Development and Manufacturing Company|
|Scope of Business and Supporting Documents||1. Those which engage in biotech or pharmaceutical research, development, or preclinical trials; and
2. Those which obtain permission from domestic or foreign competent authorities for specified business to conduct biotech or pharmaceutical human clinical trials or field trials, or obtain a biotech or pharmaceutical market or manufacturing approval from domestic or foreign competent authorities for specified business. Not applicable to those whose entire research or development work is carried out overseas.
|1. Those which engage in the entrusted biotech and pharmaceutical development and manufacturing; and
2. Those which provide relevant documents that support the capability of key process development.
|Expense Ratio||The biotech or pharmaceutical research and development expenses in the year prior to or during the year of application must account for 5% or more of the company’s total net operating revenue in the same year, or 10% or more of the company’s paid-in capital in the same year.||The amount of the machinery and equipment owned by the applicant and used exclusively for developing manufacturing processes in the year of application reaches NT$100 million or more and accounts for 10% or more of the paid-in capital in the same year.|
|Research and Development / Dedicated Personnel||At least 5 full-time biotech or pharmaceutical research and development employees with a university or higher degree are hired.||At least 5 full-time biotech and pharmaceutical employees with a university or higher degree and at least 10 full-time manufacturing employees are hired.|
2. Required application documents and procedure: (Article 3 of the Regulations)
After the research, development and manufacturing company and the contract development and manufacturing company meet the above requirements, the document supporting the registration of the company, the relevant supporting documents for the criteria of the approval of the Biotech Companies, and the investment plan may be attached and submitted to the MOEA for application of the approval.. If any of the above documents are missing and the company has not made corrections or the corrections are incomplete within two months from the date of delivery of the notice of correction from the MOEA, the MOEA will render a disposition to reject the application.
3. The effective term of the approval document: (Article 4 of the Regulations)
The MOEA will issue a five-year letter of approval for the biotech and pharmaceutical companies that have been approved as the Biotech Companies. However, the effective term shall not exceed the implementation period of the Biotech Act (until December 31, 2031), beyond which the approval will become invalid.
Please note that during the effective term of the approval letter, the annual biotech or pharmaceutical research and development expenses of the Biotech Companies or the amount of self-owned machinery or equipment for developing manufacturing processes should comply with the amount and ratio stipulated under Article 2 of the Regulations. If the Biotech Companies are found to be noncompliant with the criteria at the time of application or during the effective term of the approval letter, the MOEA may invite representatives of relevant authorities and experts to confirm the noncompliance before canceling or revoking the approval letter for the Biotech Companies and recover the tax deductions.
(The authors’ opinions do not represent the position of this law firm.)