According to Article XIX of the Constitution of the Republic of China, the people are obliged to pay tax according to law. This refers to the state assigning people the obligation in taxation or preferential treatment of waivers or reductions in tax payment under law whereby the subject of taxation, the object of taxation, the relation between the subject and object of taxation, the tax base, tax rate, and the method of tax payment and the time of payment and other components of taxation shall be defined by law. However, the competent authority may cite applicable laws within their jurisdiction with proper interpretation within their authority. If the interpretation of law by the competent authority is made in compliance with the principles of the Constitution and related legislation and the general method of the interpretation of law is duly observed, this does not defy the principle of the legal foundation of taxation (See J.Y. Interpretation Nos. 622, 660, and 685).
The issuance of call (put) warrants approved by the competent authority shall be referred to the securities issued by a third party whereby the bearers of such securities may exercise their right under the securities within a specific period or at maturity to buy or sell the underlying securities from the issuers at the exercise price, or to close the deal with cash settlement for a spread (Clause 2-2 of the Guidelines for Handling Applications of Call (Put) Warrants by Issuers.) As such, call (put) warrants are securities representing the rights of the bearers to buy or sell the underlying securities and the issuers of which are still obliged to debts under the options specified in the warrants after the delivery of the securities to the investors. Obligation in this form is different from the selling of the warrants by the bearers where the bearers are merely obliged to deliver the warrants to the buyers.
Whether the income from the issuance of call (put) warrants shall be subject to income tax or not shall depend on the definition of “securities exchange” as stated in Article 4-1 of the Income Tax Act, that “with effect from January 1, 1990, securities exchange tax shall be waived. Accordingly, capital loss from securities exchange shall not be deducted from income”. The cause of legislation for the waiver of the levy of securities exchange income tax is a simplification of procedure for the collection of securities exchange income and for the reasonable levy of tax. In practice, the Securities Exchange Tax Statute has been amended to move the rate of securities exchange tax upward thereby waiving the securities exchange income tax that should have been incorporated as parts of the total income for taxation. According to Article 1-1 of the Securities Exchange Tax Statute, only the transactions of securities in circulation shall be subject to securities exchange tax. This shows that securities exchange as defined in Article 4-1 of the Income Tax Act shall be confined to the transactions of securities in circulation. This is the rationale behind the substitution of Securities Exchange Income Tax by the Securities Exchange Tax. Transaction of the issuance of call (put) warrants is different from the trading of call (put) warrants. As such, there shall be no such thing as the levy of securities exchange tax (Point 2 in the Points of Attention forthe Enforcement of Securities Exchange Tax Statute). If there is any income deriving from the transaction of issuing, income tax shall be levied and calculated under other requirements of the Tax Code. According to the first section of the Ministry of Finance Letter Tai-Cai-Shui No. 861922464 (hereinafter, “Letter No. 1”) dated December 11, 1997, “the proceeds collected by the issuers of call (put) warrants at the time of issuance shall be premium income”, meaning that the issuance price shall be premium income and not securities exchange income. As such, Article 4-1 of the Income Tax Act shall not be applied. This is in conformity with the general interpretation of law and has not added any obligation of taxation unregulated by law. It is thus not in defiance of the doctrine of the legal foundation of taxation under Article XIX of the Constitution of the Republic of China.
Issuers may conduct related securities transactions after the issuance of the call (put) warrants for the performance or prepare to perform (hedge) the obligations under the warrants as agreed (hereinafter, “transaction for performance or hedge), and may have income. The levy of such income shall be carried out in accordance with the Income Tax Act. According to Article 24-1 of the Income Tax Act, “The calculation of corporate income shall be the total revenue of the year net of all costs and expenses, loss, and applicable tax, and the remainder shall be taxable income”, which is the revenue or spending derived from transactions of performance or hedge by the issuers of call (put) warrants, and shall be included as other income[s] and expenses for the calculation of the annual corporate income as aforementioned for taxation. However, Article 4-1 of the same law, set forth on December 30, 1989, holds that securities exchange income has been regulated by other rules and the levy of securities exchange income tax shall cease. Related securities exchange income after the issuance of the call (put) warrants shall not be stated as taxable income for the levy of income tax. Accordingly, related capital loss from securities transactions for the performance or hedge after the issuance of call (put) warrants shall not be deducted from taxable income. This is the same as the addition to the first part of Article 24-2-(1) of the Income Tax Act on July 11, 2007 that excluded the application of the special requirement of Article 4-1 of the same law. With such a provision, the issuance of call (put) warrants shall be interpreted in the same way as the first part of Article 24-1 which states that the income from related securities trade shall be included in the calculation for taxation and the loss shall be deducted from regular forms of income. The mid section of the letter in contention suggests that, “After issuers have issued the call (put) warrants, investors may elect to exercise the rights thereof by selling or buying the underlying stocks and this may result in capital gain or loss from securities exchange, and shall be recognized for income or loss at the time of performing the obligations and subject to Article 4-1 of the Income Tax Act”. The Ministry of Finance Letter Tai-Cai-Shui No. 861909311 dated July 31, 1997 (hereinafter, “Letter No. 2”) also stated that, “If the bearers of the call (put) warrants elect to seek settlement in cash at a particular point of time or at maturity… they shall be exempted from the levy of income tax as suggested in the aforementioned Income Tax Act” (Revoked under Ministry of Finance Letter Tai-Cai-Shui No. 10000400260 dated November 16, 2011). These norms are not in defiance of the meaning of the law before the addition of Article 24-2 of the Income Tax Act. This is also in compliance with the general interpretation of law and has not increased any obligation of taxation, nor is it in defiance of the doctrine of the legal foundation of taxation under Article XIX of the Constitution of the Republic of China.
No levy of income tax on securities exchange income is an exception to the levy of income tax on any income. The purpose is to substitute one tax for another and not the realization of taxation by capacity. According to the middle section of Letter No. 1 [and the] issuers of call (put) warrants as explained in Letter No. 2 shall be exempted from the levy of securities exchange income tax pursuant to Article 4-1 of the Income Tax Act but cannot deduct any loss from securities exchange. Any other individuals and business entities that have other securities exchange income[s] shall be subject to taxation under Article 4-1 of the Income Tax Act and shall not be treated otherwise. As such, the aforementioned two letters are not in defiance of the principle of taxation by capacity nor are they in conflict to the principle of equity under the Constitution of the Republic of China.
In this case, the Claimant claimed that the issuer of the call (put) warrants which subscribed to the instruments by itself at the time of issuance should not substantiate premium income[s] as stated in the first section of Letter No. 1, and suggested that the requirement of Article 4-1 of the Income Tax Act and Verdict Pan-Zi No. 96 of the Administrative Court (reorganized as the Supreme Administrative Court) in 1973 are susceptible of violating the Constitution of the Republic of China. The statement presented by the Claimant only argued that the application of the law and ruling were improper, but failed to present solid evidence to suggest the aforementioned letters, regulations, and verdicts were in violation of the Constitution of the Republic of China. According to Article 5-1-(2)~(3) of the Constitutional Interpretation Procedure Act, the aforementioned claims shall not be accepted.
Translated by Roger K. C. Wang