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  • Interpretation
  • No.195
  • Date
  • 1985/05/31
  • Issue
    • Is the provision of Paragraph 2 of Article 25 of the Enforcement Rules of the Act of Encouragement of Investment in conflict with the Constitution?
  • Holding
    •        The provision of Paragraph 2 of Article 25 of the Enforcement Rules of the Act of Encouragement of Investment promulgated in 1978 is not clear enough and may cause misapplication of Article 15 of the Income Tax Act, which is inconsistent with the legislative intent of the Act of Encouragement of Investment.  However, there is no contradiction with Article 19 of the Constitution.
  • Reasoning
    •        Article 19 of the Constitution provides: “The people shall have the duty of paying taxes in accordance with law.”  Under Article 17, Paragraph 1, Subparagraphs 1 and 2 of the Act of Encouragement of Investment promulgated on July 26, 1977, a non-resident individual who obtains earnings distributed to shareholders by a company within the territory of the R.O.C. is permitted to withhold and pay income tax from the source in accordance therewith, and the provision of filing a tax return under the Income Tax Act does not apply.  The legislative purpose of the said provision of law is to attract foreign capital by lessening the tax burdens of investors and enhancing the willingness of overseas Chinese and foreign nationals to make investments.  Therefore, the portion of income tax under the Act of Encouragement of Investment is a special law of the Income Tax Act.  The tax payment duty of the people who are encouraged to make investments should be mainly based on the above-mentioned Act of Encouragement of Investment.
      
    •        If both husband and wife reside in a foreign country, and they respectively apply and are approved for investment, and their investment meets the provisions of Subparagraph 1 of Paragraph 1 of Article 17 of the above-mentioned Act for the Encouragement of Investment, even though one of them acts as a director, supervisor or manager of the enterprise in which he or she invests and stays in the R.O.C. for 183 days in a taxable year to manage and operate such enterprise so that he or she should be regarded as an individual residing in the R.O.C. and file annual consolidated income tax in accordance with Subparagraph 2 of Paragraph 2 of Article 7 of the Income Tax Act, as his or her spouse meets the provision of Subparagraph 1 of Paragraph 1 of Article 17 of the Act of Encouragement of Investment, such spouse is entitled to the encouragement.  The tax on the income derived from the distribution of the earnings should be withheld and paid at the source, and the provision regarding filing an annual income tax return should not apply so as to meet the purpose of encouragement of investment of the nation.
      
    •        Paragraph 2 of Article 25 of the 1978 Enforcement Rules of the Act of Encouragement of Investment provides: “The provision regarding exemption from filing an annual income tax return shall not apply to the income derived from earnings distributed by a company or distributable to a partner under Article 17 of the Act which should be filed by the individual residing in the R.O.C.”  The meaning of this provision is not clear, and the application of this provision may cause the misapplication of Article 15 of the Income Tax Act, which provides: “Where the spouse of a taxpayer…has any of the income under the preceding Article, the taxpayer shall include such income in his income return for taxation.”  As a result, the husband and wife who respectively apply and are approved for investment have to include in the tax return the income from distribution of earnings by the invested enterprise so that the investor’s tax burden increases, which is inconsistent with the legislative intent of the above-mentioned Act for the Encouragement of Investment.  However, Article 19 of the Constitution is not contradicted. 
      
    • *Translated by Dr. C.Y. Huang of Tsar & Tsai Law Firm.
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