In order to maintain tax justice, the Legislative Yuan passed the first reading of the Income Tax Law Amendment (the “Draft Amendment”) on December 21, 2020. The draft amendment obliges individuals to include their capital gains from the sale of unlisted shares when calculating their basic income tax (also known as alternative minimum tax; “AMT”).
The basic principle of the draft amendment is that such capital gains are already exempt from income tax under Article 4-1 of the Income Tax Act. With such gains further excluded from the AMT’s calculation, unlisted stocks could easily be used as a tax planning tool for taxpayers to convert taxable business income (i.e. dividend income) or taxable capital gains from real estate transactions into non-taxable capital gains from the sale of stocks.
For example, a person owns real estate through a company and sells the company’s stock to others, essentially transferring the real estate to others. In such circumstances, taxpayers often use this method to avoid the income tax payable on real estate transactions because ownership of the property has not technically been transferred (it remains with the company).
Additionally, capital gains from stock transfers are not subject to income tax or AMT under applicable tax laws (only securities transaction tax would be triggered). In this example, the taxpayer avoids not only the tax liability from real estate transactions, but also the tax liability from security transactions.
Given that taxpayers often use this method to convert taxable capital gains from real estate transactions into non-taxable capital gains from the sale of stocks in order to maintain tax fairness, capital gains from such transactions would be required once the draft amendment goes into calculation of the AMT to be involved; If AMT is payable it is 20%.
The tax implications of selling shares are summarized in the following table: