2021-09-22

Administrative Court Rules Share Exchanges under Corporate Merger and Acquisition Law are Exempt from Securities Transactions Tax

The 2021 Taiwan's best annual taxation cases selection (2021年臺灣年度最佳稅法判決評選), jointly hosted by the Research Center for Taxation and Public Finance Law at National Taiwan University (NTU) (臺灣大學法律學院財稅法學研究中心) and other institutes, announced the 10 best annual selected taxation cases ("Selected Cases") on 2 September 2021.  In one of the Selected Cases, the Taipei High Administrative Court Judgments (108) Su Tze No. 1649 ("The Case", 臺北高等行政法院108年度訴字第1649號判決), ruled that share exchanges (股份轉換) transacted under the Corporate Merger and Acquisition Law (企業併購法) are exempted from the securities transactions tax (證券交易稅).
 
According to the facts of The Case, the acquiring company A (a listed company) merged with the acquired company B (an unlisted company) by issuing new shares in exchange for all of company B's shares owned by company B's shareholders, to become the sole parent company of company B.  The National Taxation Bureau for the Northern Area, Ministry of Finance ("NTBNA", 財政部北區國稅局) then determined that company B's shareholders obtained income from said securities transactions and were thus required pay the Securities Transactions Tax.  One of company B's shareholders, who was ordered to pay an overdue tax by NTBNA and who was penalized for failing to report his income, initiated an administrative litigation seeking to revoke the above administrative disposition and penalty.
 
Based on the following reasons, the Taipei High Administrative Court eventually ruled in favor of the plaintiff, company B's shareholder, and revoked NTBNA's above administrative disposition:
 
  1. Pursuant to the definition of "Sale" and "Exchange" in the Civil Code, the object of the securities transactions tax is limited to the income realized and proved in the trade market, excluding any "net accretion of funds" (純資產增加).
 
  1. Although company B's shareholders obtained company A's new-issued shares through the share exchange, those new-issued shares in fact evidence the same rights of company B's original shares, only in different forms.  Thus, those newly issued shares do not constitute income realized for company B's shareholders, and therefore, the securities transactions tax shall not be imposed.  
 
  1. The purpose of the regulations for Article 39 of the Corporate Merger and Acquisition Law also shows that a share exchange carried out under a merger is not within the scope of a "securities transaction".
 
However, the ruling of The Case does not create a unanimous (or unified) opinion of the Taipei High Administrative Courts.  In contrast, some of the Administrative  Court's other judgments have ruled that the price difference between the acquiring company's newly issued shares and that of the acquired company's original shares is a proper object of the Securities Transactions Tax.
 
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