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  • Interpretation
  • No.413
  • Date
  • 1996/09/20
  • Issue
    • Does the Administrative Court Precedent restricting the privilege of tax reduction and exemption conferred by the Act of Encouragement of Investment and the Act Governing the Upgrading of Industries on nonresident aliens or overseas Chinese who have invested in an ROC business and resided in the ROC for over 183 days in a taxable year to manage their investment to those who have no spouse residing in the ROC add a new condition nonexistent in the laws, thus contravening the principle of taxation by law as enunciated in Article 19 of the Constitution?
  • Holding
    •        Where an individual who is not a resident of the Republic of China makes an investment in the Republic of China in pursuance of an approval granted under the Act of Investment by Overseas Chinese or the Act of Investment by Foreign Nationals, holds the office of a director, supervisor, or manager of the business in which he invests, and has resided within the Republic of China for over 183 days in a particular taxable year as set forth in Article 7, Paragraph 2, Subparagraph 2, of the Income Tax Act, for the purpose of handling or managing the business, the dividend he receives from such business shall be taxable by withholding at source at the fixed rate under Article 16, Paragraph 1, Subparagraph 1, of the Act of Encouragement of Investment (since repealed), and Article 11, Paragraph 1, of the Act Governing the Upgrading of Industries, and the provisions in the Income Tax Act in respect of filing of final tax return shall be made inapplicable. This is clearly prescribed in Article 17 of the Act of Encouragement of Investment, and Article 11, Paragraph 2, of the Act of the Upgrading of Industries. The Administrative Court Judgment No. Pan-673 of 1974, which quotes: "The term *withholding at source* in the Income Tax Act, Article 2, Paragraph 2; the Act of Encouragement of Investment, Article 17; and the Enforcement Rules of the Act of Encouragement of Investment, Article 25(1) denotes an individual who is not a resident of the Republic of China and has no spouse residing in this country. If either the husband or the wife is a resident and taxpayer of the Republic of China, his or her income earned in this country shall be taxable, and he or she shall file a joint income tax return even though his or her spouse is a nonresident," adding to the law an element requiring nonresident status of the spouse and imposing a restriction not legally provided, is contrary to the principle of taxation by law embodied in the Constitution and must therefore be ignored.
  • Reasoning
    •        The legislative purposes of the Act of Encouragement of Investment (repealed on December 31, 1990) and the Act Governing the Upgrading of Industries are to encourage investment and to accelerate the development of the national economy. The provisions in said Acts in respect of tax withholding at source shall be given prior applicability over the Income Tax Act clauses on the filing of final returns. To attain the aforesaid purposes by inviting foreign capital, such provisions are also made applicable to all persons making investment in this country under the Act of Investment by Overseas Chinese and the Act of Investment by Foreign Nationals in the hope of minimizing the investors* taxation and thereby increasing the interest of overseas Chinese and foreign investors. It must be noted that the provisions set forth in the Act of Encouragement of Investment and the Act Governing Upgrading of Industries with respect to income tax are special laws of the Income Tax Act, and that the provisions therein contained in respect of reduced taxation shall naturally be applicable to the tax duty of those who have made investment under the legal incentive programs (See J. Y. Interpretation No. 195).
      
    •        The Constitution provides in Article 19 that the people shall have the duty to pay tax in accordance with law. This means that the people have the duty to pay tax and the privilege to enjoy tax benefits pursuant to the taxpaying bodies, tax denominations, tax rates, methods of tax payment, and tax reduction and exemption as they are prescribed by law. Any tax matter that shall be explicitly prescribed by law may not be regulated by administrative orders in lieu of or against law. This has been repeatedly maintained by us in our Interpretations Nos. 217, 367 and 385. It follows without doubt that court decisions, likewise, may not go beyond the tax denominations, tax rates, tax reduction or exemption, tax benefit, or other tax matters specified in law or add any rules not existing in the law, thereby increasing the taxation of the people and ultimately constituting a violation of the principle of taxation by law embodied in the Constitution.     
      
    •        The Act of Encouragement of Investment, as amended on January 26, 1987, provides in Article 16, Paragraph 1, Subparagraph 1: "The income tax payable by a person making investment pursuant to an approval granted under the Act of Investment by Overseas Chinese or the Act of Investment by Foreign Nationals shall be withheld at source by the withholder specified in the Income Tax Act at the rate of twenty percent (20%) of the amount to be paid or distributed to him." Article 17 of the same Act provides: "Where an individual who is not a resident of the Republic of China makes investment in the Republic of China in pursuance of an approval granted under the Act of Investment by Overseas Chinese or the Act of Investment by Foreign Nationals, holds the office of a director, supervisor, or manager of the business in which he invests, and has resided within the Republic of China for more than 183 days in a particular taxable year as set forth in the Income Tax Act, Article 7, Paragraph 2, Subparagraph 2, for the purpose of handling or managing the business, the provision of Subparagraph 1 of Paragraph 1 of the preceding article may be applicable to the dividend he receives from such business." The same provision is incorporated in Article 11 of the Act Governing the Upgrading of Industries. Suffice it to say that, insofar as the elements required by the foregoing clauses are present, the provisions for withholding at source at the specified rate as quoted above shall govern, and the provisions in the Income Tax Act with respect to filing of final income tax returns shall be rendered inapplicable, so that the legislative intent of those provisions and the doctrine that a special law prevails over a general law are followed. Nevertheless, the Administrative Court Judgment No. Pan-673 of 1974 rules that: "The term *withholding at source* in the Income Tax Act, Article 2, Paragraph 2; the Act of the Encouragement of Investment, Article 17; and the Enforcement Rules of the Act of Encouragement of Investment, Article 25(1) denotes an individual who is not a resident of the Republic of China and has no spouse residing in this country. If either the husband or the wife is a resident and taxpayer of the Republic of China, his or her income earned in this country shall be taxable, and he or she shall file a joint income tax return even though his or her spouse is a nonresident." Consequently, the court has added to the law an element requiring nonresident status of the spouse and imposed a restriction not legally provided, and this is certainly contrary to the principle of taxation by law embodied in the Constitution as well as the essence of this Interpretation, and must therefore be ignored. With regard to the question of whether the taxpayer or his/her spouse should be denied, on the ground of absence of the element required, his or her status as "a person who is not a resident of the Republic of China" because the taxpayer or his/her spouse maintains a domicile or does something in the Republic of China and is therefore not a subject to whom the Act of Encouragement of Investment or the Act Governing the Upgrading of Industries is applicable, and for this reason a joint income tax return must be filed under Article 15 of the Income Tax Act, is a separate issue of law to be resolved based upon the facts found, and is beyond the scope of this Interpretation. 
      
    •        Besides, the Petitioner asserts in general language that Article 1002 of the Civil Code, which provides that "a wife shall take the domicile of the husband as her domicile, and a chui-fu (a son-in-law who takes the place of a son and lives in his wife’s home, usually an heirless family. [This definition was taken from the Far East Chinese-English Dictionary.]) shall take the domicile of the wife as his domicile, except where it is agreed that the husband shall take the domicile of the wife as his domicile or the wife shall take the domicile of the chui-fu as her domicile" contradicts the provision of Article 7 of the Constitution with respect to gender equality. Inasmuch as the Petitioner has made no specific statement on the exact points of conflict between the Constitution and the Civil Code article quoted above, this issue is also beyond the scope of this Interpretation.  
      
    • *Translated by Raymond T. Chu
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