With respect to the tax reductions for investing in domestic high-risk startups (hereinafter referred to as “High-risk Startups”), according to Taiwan’s Statute for Industrial Innovation (the “Statute”) which was the subject of our previous article, one can enjoy income tax reduction in Taiwan on the “amount of investment” invested in the startups. That is, if an individual invests at least NT$1 million in cash in a startup and holds such shares issued for 2 years, 50% of the investment amount can be excluded from the gross consolidated taxable income within a limit of up to NT$3 million.
Aside from the tax reduction on the investment amount, one can also enjoy tax reduction on “profits gained from the transaction” under the Income Basic Tax Act of Taiwan (the “Basic Tax Act”) as amended at the beginning of this year. According to the Basic Tax Act, if an individual sells shares of a company that is considered as a High-risk Startup by the competent authority, and that the company is established less than 5 years at the time of the transaction, the profit gained from the sale is excluded from the net consolidated taxable income under the Basic Tax Act.
To define the High-risk Startup under the Basic Tax Act, the Ministry of Finance and Ministry of Economic Affairs has issued the Regulation on Recognition of High-Risk Innovation Startups under Article 12 of the Income Basic Tax Act (the “Regulation”) on April 14. Under the Regulation, a High-risk Startup must meet at least one of the following three (3) qualifications:
The company has been incorporated for less than 5 years and meets all the following criteria: (i) its technology, creativity or business model is innovative and developmental; (ii) it provides solutions to the target market or create demand; and (iii) products or services under development have the potential for marketization.
The company has been incorporated for less than 5 years and has obtained approval by the majority of the innovation and creativity examination committee, acquired an “Innovation and Creativity Opinion Letter” from a recognized agency by the Taipei Exchange, or possessed a recommendation letter from the competent authority explaining the innovation and creativity nature of the company pursuant to the Regulations Governing the Go Incubation Board for Startup and Acceleration Firms to be listed on the Go Incubation Board for Startup and Acceleration (“GISA”).
The company is qualified as a High-risk startup under Article 23-2 of the Statute (which was the subject of our previous article).
In order to meet the first standard, the company has to file an application to the competent authority for approval. The validity period of the approval is 2 years. The company may reapply after the approval has expired if the standard is still met at that time. On the other hand, the company that satisfies the second or third standard is regarded as a High-risk Startup under this Regulation without further application.
To qualify for tax reductions pursuant to this Regulation, the issuing company of the trading shares needs to be recognized as a High-risk Startup according to the standards above before the transaction date. Furthermore, High-risk Startups under the Statute are those which are incorporated for 2 years or less. Therefore, for companies regarded as High-risk Startups according to the third standard above, if an investor divests shares after the second anniversary of the date of incorporation, such sale will not qualify for this tax reduction under the Basic Tax Act, unless such sale meets the first or the second qualification mentioned above.