The amended Regulation on Income Deduction for Individuals Investing in Innovative Startups (hereafter referred to as the “Regulation”) has been implemented since January 1st this year (year 2021). This Regulation is based on Article 23-2 of Statute for Industrial Innovation (hereafter referred to as the “Statute”). According to this Statute, if an individual invests at least NT$1 million in cash in innovative startups and holds the new shares issued by the startups for two years, for income tax purposes 50% of the investment amount can be excluded from the gross consolidated taxable income, within a limit of up to NT$3 million.
In order to qualify for the tax deduction in Taiwan, the startup in question must be both “domestic” and “high-risk”. “Domestic” means that the startup company in question needs to be organized and incorporated in accordance with the Taiwan Company Act. “High-risk” under the Regulation means that the startup company in question has been incorporated for less than two years and meets all of the following three criteria: (i) its technology, creativity or business model is innovative and developmental; (ii) it provides solutions to the target market or create demand; (iii) products or services under development have the potential for marketization. Those who are eligible can prepare the requirement documents such as application form, operational plan and file the application to the Ministry of Economic Affairs (“MOEA”) within two years from the incorporation date to qualify as a “high risk” innovative startup. According to the website of MOEA, as of March 17, 2021, there are 82 Taiwan startups in compliance with this Regulation, which is not a large number. In order to qualify for the tax deduction, an investor must file a claim for such deduction in the tax return for the calendar year during which the 2-year shareholding period has been met. If an investor fails to claim the tax deduction during such calendar year, the tax deduction will expire and cannot be deferred to a subsequent calendar year.
The purpose of Article 23-2 of the Statute is to encourage investment and facilitate innovation development. However, whether startups in Taiwan can really benefit from it is another question. There are few issues that need to be considered:
Firstly, the definition of “high-risk” startups is vague, which will consequently result in subjective standards of review. Thus it will be difficult for startups to assess the chance of approval in advance before applying for this “high risk” innovative company qualification.
Secondly, the document preparation process could be a burden for many startups.
In addition, many startups in Taiwan prefer to set up an offshore company with a branch office or subsidiary in Taiwan. If the company is set up using an offshore structure, investors cannot enjoy the tax reduction under this Regulation.
The biggest challenge for many early-stage startups is fundraising and it is worth deliberating whether such Regulation can affect investors’ incentive or motivation to invest in startups in Taiwan.