Teresa Huang and Tina Lee
In view of the extensive time and huge amounts of capital spent by biotech and pharmaceutical companies (hereinafter, the “Biotech Companies”) from the successful development of product items to their marketing, Articles 7 and 8 of the Act for the Development of Biotech and Pharmaceutical Industry (hereinafter, the “Act”) specifically provide that the policy of applying tax credits to the income generated by shareholders may apply to investment in the Biotech Companies that meet the statutory criteria by profit-seeking enterprises or individuals in order to facilitate the fund-raising of the biotech and pharmaceutical industry.
In this regard, the Ministry of Economic Affairs (hereinafter, the “MOEA”) pre-announced on May 30, 2022 the draft Amendments to the Regulations Governing the Applicability of Investment Tax Credits to Profit-seeking Enterprises as Biotech and Pharmaceutical Companies’ Shareholders (hereinafter, the “Enterprise Tax Credits Regulations”) and the draft Regulations Governing Individuals’ Tax Deductions for Proceeds From Investments in Biotech and Pharmaceutical Companies (hereinafter, the ” Individuals’ Tax Deductions Regulations). These regulations are highlighted below:
I. Conditions of investment tax credits
|Profit-seeking Enterprises Shareholders
(Article 4 of the Enterprise Tax Credits Regulations)
(Article 3 of the Individuals’ Tax Deductions Regulations)
|1. The shareholders have become registered shareholders of the Biotech Companies for at least three years; and
2. The Biotech Companies have not applied for the exemption of profit-seeking enterprise income tax or shareholder’s investment tax credits in accordance with other laws and regulations for such share subscription or equity placement amount.
|1. The shareholders reside in the territories of the Republic of China;
2. The annual share subscription payment to the same company reaches NT$1 million; and
3. The shareholders have held shares for three years since the payment date.
II. Investment tax credit limit
(1) Profit-seeking enterprises shareholders
The profit-seeking enterprise shareholders may deduct up to 20% of the cash value of the stock acquired from the amount of profit-seeking enterprise income tax payable for each year for five years from the year in which the profit-seeking enterprise is subject to income tax. In the case of a venture capital enterprise, the investment tax credit amount so enjoyed should be calculated by the originally available tax credit amounts of its profit-seeking enterprise shareholders in proportion to their ownership of the shares, and the profit-seeking enterprise income tax payable for each year may be set off for five years from the fourth year in which the venture capital enterprise becomes a registered shareholder of the Biotech Company.
However, it should be noted that, in principle, the total amount of tax credit available to the profit-seeking enterprise shareholders for each year shall not exceed 50% of the amount of the income tax payable by the profit-making enterprise for that year, but if the Biotech Company has applied for an investment plan approval letter before December 31, 2021, the total amount of the annual tax credit for the shareholders of the profit-seeking enterprise is not subject to the 50% restriction (Article 4 of the Enterprise Tax Credits Regulations).
(2) Individual shareholders
An individual shareholder may deduct 50% of the amount of his or her investment from his or her gross amount of individual consolidated income for two years from the year in which the individual shareholder has held the stock for three years. However, the amount of deduction is capped at NT$5 million per year (Article 3 of the Individuals’ Tax Deductions Regulations).
III. Documents required for tax credit/incentive application
(1) Application for an approval letter for a biotech and pharmaceutical investment plan
When the Biotech Companies apply for tax credits/incentives under Articles 7 or 8 of the Act for profit-seeking enterprise shareholders or individual shareholders, the Biotech Companies are required to include the required documents (such as the company registration form, original roster of shareholders, investment plan, the approval letter for the Biotech Company, etc.) in the application to the MOEA for an investment plan approval letter within the statutory period (within six months from the date of incorporation of the company if a new company is invested and established; and within six months from the date of the company’s amendment registration of its capital increase if the capital of the company is increased or expanded) (Article 3 of the Enterprise Tax Credits Regulations and Article 4 of the Individuals’ Tax Deductions Regulations).
(2) Application for the certificate of shareholders’ investment credit amount
After three years from the date of the share subscription payment in cash by profit-seeking enterprise shareholders or individual shareholders, the Biotech Company shall include the required documents (such as a photocopy of the company registration document, investment plan approval letter, minutes of the shareholders’ meeting/promoters’ meeting, etc.) in the application to the tax authority in the place where the company is located for a certificate of investment tax credit amount for a profit-seeking enterprise shareholder or the certificate showing the deduction of investment from the gross consolidated income of an individual shareholder (Article 5 of the Enterprise Tax Credits Regulations and Article 5 of the Individuals’ Tax Deductions Regulations).
(3) Application for a certificate of investment plan completion and for item amendments or extension of an investment plan
The Biotech Companies applying for the tax incentives for profit-seeking enterprise or individual shareholders are required to complete the investment plan within five years from the date the investment plan approval letter is issued and to include relevant documents in the application to the administrative unit in the place where the investment plan is implemented for a certificate of completion within six months from the date of completion of the investment plan with a copy to the Taxation Administration under the Ministry of Finance and the tax authority in the place where the company is located.
If the Biotech Companies fail to complete the investment plan within five years from the date the investment plan approval letter is issued, or if there is a change in the items of the investment plan, they shall apply to the MOEA for an extension or change before the expiration of the aforementioned period, provided that the entire plan should be completed in six years.
If the Biotech Companies fail to complete the investment plan within the prescribed period, they shall notify the MOEA within six months after the expiration of the period that they cannot complete the investment plan (Articles 6 and 7 of the Enterprise Tax Credits Regulations and Articles 6 and 7 of the Individuals’ Tax Deductions Regulations).
IV. Recovery provisions
If the approval letter of the Biotech Company is canceled or revoked, the amounts of tax credits that have been applied to its profit-seeking enterprise shareholders or individual shareholders shall be recovered with interest by the tax authority (Article 10 of the Enterprise Tax Credits Regulations and Article 10 of the Individuals’ Tax Deductions Regulations).
If the Biotech Companies fail to utilize the funds raised to fully fund the investment plan, the amounts of investment tax credits applicable to profit-seeking enterprise shareholders and individual shareholders will be calculated based on the ratio of the amount paid for the investment plan to the amount of funds raised. (Article 11 of the Enterprise Tax Credits Regulations and Article 11 of the Individuals’ Tax Deductions Regulations)
(The authors’ opinions do not represent the position of this law firm.)