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  • Interpretation
  • No.506
  • Date
  • 2000/05/05
  • Issue
    • The Enforcement Rules of the Income Tax Act provide that the dividends of shares distributed to the shareholders shall be subject to the levy of income tax. Do the said provisions violate Article 19 of the Constitution, thus being null and void?
  • Holding
    •        The object of the levy in the Income Tax Act concerning income tax borne by a profit-seeking business is stipulated as a general provision. The revenue of a business entity deriving from business and other sources, unless exempted by law, shall be subject to taxation that, thus, coincides with the principle of tax equity. Article 70, Paragraph 1, of the Enforcement Rules of the Income Tax Act, as amended on March 26, 1981, provides: “When a corporation increases its capital by allotting undistributed profits to shareholders, unless otherwise complying with Article 13 of the Act of Encouragement of Investment, the dividends of shares distributed to shareholders shall be subject to the levy of income tax upon distribution and the tax shall be withheld by the company upon distributing the dividends. The shareholders receiving the distribution shall include such dividends in their taxable income when they lodge their tax return of the corresponding year.” This stipulation is not inconsistent with the goal and the purview of Article 76-1, Paragraph 1, and relevant provisions concerning the authorization in the Income Tax Act and hence constitutes no violation of the Constitution. As elaborated in the Tai-Tsair-Shuey Ordinance No. 31235 issued by the Ministry of Finance, dated February 20, 1975, under Articles 12 (i.e., Article 13 of the Act of Encouragement of Investment as amended on December 30, 1980, and the corresponding provisions of Articles 16 and 17 of the current Act for Upgrading Industries.) and 15 of the Act of Encouragement of Investment, any share from the increase of capitalization acquired by a company and any profit derived from the sale of shares retained for more than one year or other incomes not regarded by relevant laws as taxable income for that taxation year may be exempted from the taxable income for the corresponding year and not be subject to the levy of business income tax. However, such incomes shall be included in the total income of the company and be calculated as undistributed profits. This Ordinance by the tax collection authority, based on its jurisdiction and duty, is a necessary interpretation and coincides with the meaning of the said law in order to enforce the relevant taxation statutes. It is consistent with the regulating purpose of the Act for Upgrading Industries and the principle of taxation by law of Article 19 of the Constitution as well.
  • Reasoning
    •        In addition to executing the law that provides and regulates matters concerning the freedom and the rights of the people, the authority in charge may also be empowered by law to promulgate regulations or rulings specifically in dealing with such matters. In judging whether a regulation or ruling is consistent with the essence of the lawful authorization, the consideration shall not be confined to the wording of the law. Rather, an assessment shall be based on the legislative and overall purpose of the relevant law. With regard to the tax statutes, the tax collection authority in making necessary interpretations shall base its authority on the principle of taxation by law in connection with the legislative purpose of the law in question and shall consider the economic function of taxation as well as the principle of tax equity. This approach has been repeatedly elaborated in J.Y. Interpretations Nos. 420 and 438, respectively.
      
    •        The object of the levy in the Income Tax Act concerning income tax borne by a profit-seeking business is stipulated as a general provision. The income deriving from business and other sources, unless exempted by law, shall be subject to taxation. This rationale is demonstrated in Articles 3, 8 and 24 of the Income Tax Act. Article 76-1, Paragraph 1, of the Income Tax Act, as amended on January 30, 1977, prescribes the following method of taxation with respect to the increase of capitalization from undistributed profits and to those retained as profits: “In the case of the retained profits of a profit-seeking enterprise organized in the form of a corporation having been accumulated to an amount equal to more than one-half of its paid-up capital, the profit-seeking enterprise shall, in the following business year, make the increase of capitalization by using its retained profits, but the total amount of its retained profits shall not exceed one-half of its paid-up capital after the increase of capitalization. Where a profit-seeking enterprise fails to make the increase of capitalization in accordance with this Act, the tax collection authority shall, in accordance with the total amount of retained profits, make a calculation of distributable profits for its shareholders and based upon the tax rates applicable in the taxable year, levy the income tax on the distributed profits per share.” Article 70, Paragraph 1, of the Enforcement Rules of the Income Tax Act, as amended on March 26, 1981, provides: “When a corporation increases its capital by allotting undistributed profits to shareholders, unless otherwise complying with Article 13 of the Act of Encouragement of Investment, the dividends of shares distributed to shareholders shall be subject to the levy of income tax upon distribution and the tax shall be withheld by the company upon distributing the dividends. The shareholders receiving the distribution shall include such dividends in their taxable income when they lodge their tax return of the corresponding year.” This stipulation is not inconsistent with the goal and the purview of the above and relevant provisions concerning the authorization in the same Income Tax Act. The Tai-Tsair-Shuey Ordinance No. 31235 issued by the Ministry of Finance, dated February 20, 1975, also provides the following: Pursuant to Articles 12 (i.e., Article 13 of the Act of Encouragement of Investment as amended on December 30, 1980, and the corresponding provisions of Articles 16 and 17 of the current Act for Upgrading Industries.) and 15 of the Act of Encouragement of Investment, any share from the increase of capitalization acquired by a corporation and any profit derived from the sale of shares retained for more than one year or other incomes not regarded by relevant laws as taxable income for that taxation year may be exempted from the taxable income for the corresponding year and not subject to the levy of business income tax. However, such incomes shall still be included in the total income of the corporation and be calculated as undistributed profits. This ruling was merely intended to elaborate that any share from the increase of capitalization acquired through reinvestments by a corporation may be exempted from the levy of business income tax of the corresponding year. Nevertheless, such acquired shares shall be included in the total income of the corporation in order to ensure that no business income or other revenue is excluded from the object of taxation. This ruling is therefore within the purview of Article 76-1, Paragraph 1, of the Income Tax Act and is a necessary interpretation by the tax collection authority based on its jurisdiction and duty in enforcing relevant tax regulations, thus coinciding with the legislative purpose of the Act for Upgrading Industries which encourages investment from incorporated business entities. 
      
    •        To summarize, the said Article 70, Paragraph 1, of the Enforcement Rules of the Income Tax Act and the Tai-Tsair-Shuey Ordinance No. 31235 issued by the Ministry of Finance, dated February 20, 1975, constitute no violation of Article 19 of the Constitution.  
      
    • *Translated by Dr. Cheng-Hwa Kwang.
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