Teresa Huang and Hannah Kuo
In order to encourage top executives and technology investors to participate in the operation and research development of biotech and pharmaceutical companies (hereinafter, the “Biotech Companies”) and share business benefits, Articles 9 and 10 of the Act for the Development of Biotech and Pharmaceutical Industry (hereinafter, the “Biotech Act”) respectively states that newly issued shares or stock options obtained by top executives of the Biotech Companies as rewards and by technology investors of the Biotech Companies in return for their contribution of technology know-how may be elected to be applied to the income-tax deferral system, and a top executive or a technology investor who has held such shares and continued to be employed by or provide technical services for at least two years may choose to have paid income tax based on the “transfer price” or the “current price or price at the time acquired”, whichever is lower.
For this purpose, the Ministry of Economic Affairs (hereinafter, “MOEA”) and the Ministry of Finance (hereinafter, “MOF”) have drafted and announced relevant sub-laws for public opinion. The sub-laws include Regulations Governing the Tax Deferral for a Top Executive or Technology Investor in Biotech and Pharmaceutical Companies (hereinafter, “Regulations on Tax-Deferred Stocks”), Regulations Governing Biotech and Pharmaceutical Companies’ Issuance of Stock Options (hereinafter, “Regulations on Stock Options”), and Regulations Governing Application of Deferred Taxation of Income Tax in Accordance with the Act for the Development of Biotech and Pharmaceutical Industry (hereinafter, “Regulations on Deferral Application”). The Regulations are highlighted below:
I. Eligible Individuals: “Top executives” refers to those who hold positions of CEO or a managerial officer or above in the Biotech Companies and have either expert technique, knowledge, or patents, copyrights, trade secrets, integrated circuit layout rights, plant variety rights, or other relevant legal rights created by law in new drugs, new dosage forms, high-risk medical devices, regenerative medicine, precision medicine, digital medicine, and innovative technology platforms dedicated to the biotech and pharmaceutical industry area. “Technology investor” refers to the investors who provide the Biotech Company with the technology know-how that it needs in return for the acquisition of its shares. (Article 2 of the Regulations on Tax-Deferred Stocks, Article 2 of the Regulations on Stock Options).
II. Tax-deferred Stocks: The tax-deferred stocks indicated in Articles 9 and 10 of the Biotech Act include the newly issued shares obtained by top executives of the Biotech Companies as rewards and by technology investors of the Biotech Companies in return for their contribution of technology know-how, as well as the shares obtained by top executives or technology investors by exercising their stock options. To accommodate the implementation period of the Biotech Act, the date of the resolution of the board of directors or the shareholders’ meeting of the Biotech Companies to issue the shares or the stock options, and the date on which the aforesaid top executives or technology investors acquire the shares or the stock options should be between January 1, 2022, and December 31, 2031. (Articles 3 and 7 of the Regulation on Tax-Deferred Stocks)
III. Individual Opting for Deferred Income Tax: Top executives or technology investors who opt for the deferred income tax should select to defer income tax on all shares acquired when they acquire the shares. (Article 3 of the Regulations on Tax-Deferred Stocks)
IV. Biotech Companies Applying for Deferral Certification: The company issuing the shares should apply to the MOEA for deferral certification within four months from the next day after the date of incorporation or approval of the amendment of registration for the issuance of shares. (Articles 4 and 5 of the Regulations on Tax-Deferred Stocks)
V. Biotech Companies Applying for Recordation: After a top executive has been employed or a technology investor has been providing services for two years, the Biotech Company shall apply to the MOEA for recordation within two months. (Article 6 of the Regulations on Tax-Deferred Stocks)
VI. Biotech Companies Issuing Stock Options: The Biotech companies should prepare the legal documents when applying to the MOEA to issue stock options, including but not limited to: the approval letter for the Biotech Company, the company operation plan, and the diplomas and certificates documenting the education and professional experiences of the top executives or technology investors for applying to issue stock options. If the stipulated price of the stock option is not lower than the par value of the share, it will be examined by the MOEA; if it is lower than the par value of the share or if the share has no par value, the MOEA will invite a representative from relevant government agencies and scholars and experts, forming a review committee to review the application. (Articles 3 and 5 of the Regulations on Stock Options)
VII. Obligation of Biotech Companies to File Income Tax Returns: From the year in which the top executives and technology investor obtain the shares to the year in which the income is assessed, when filing annual income tax returns each year, the Biotech Company shall file the profit-seeking income tax return forms, detailed formats of tax reduction, and attach relevant statutory documents, such as a copy of the letter of recognition from relevant authorities for top executive’s rewarding or the technology investor’s shareholdings. (Article 2 of the Regulations on Deferral Application)
VIII. Exemption from Withholding Obligations for Tax-Deferred Stocks and Stock Options: Those who apply to the regulation of tax deferral under the Biotech Act are exempted from withholding obligations when making a payment; however, if the authorities deny the application or revoke the approval of the Biotech Company, the tax withholder shall retroactively withhold, declare, and issue withholding exemption certificates within the time limit. (Article 6 of the Regulations on Deferral Application)
(The authors’ opinions do not represent the position of this law firm.)