Income from Exercise of Offshore Stock Options by Employees of Local Establishment of Foreign Companies Determined as Taxable Salary Income. NTAT to Look into Relevant Taxation Record of The Past Five Years.

The Taipei High Administrative Court (“the Court”) decided on the first administrative action yesterday (2005.06.01) concerning taxability of income from sale of offshore stock options.  The Court holds that income received by the employee from sale on the US capital market of stock options for purchasing shares in the US parent company is considered income generated within the territory of the ROC and hence taxable so long as the Taiwanese employer company shared the paying of subsidies to such employee with respect to the sale.  This decision by the Court is expected to substantially impact the rights and interests of the employees of foreign companies’ establishment/s in Taiwan.  In light of the decision, National Tax Administration, Taipei (“NTAT”) expressed it would look into the relevant taxation record of the past five years.

 

According to the NTAT, the taxpayer plaintiff in the administrative suit sold his options for purchasing stocks in Compaq USA and received a sum of USD479,761.78 (about NTD15.9 million) from the company as subsidy for the difference between the subscription price and the market value.  The NTAT said this money received does not belong to the tax-free income from securities transactions nor offshore income but income generated as a result of the employee’s providing services to Compaq.  The NTAT therefore requested that the taxpayer plaintiff supplement the tax payable on such income and imposed penalty on him for having failed to do so.  The taxpayer plaintiff thus initiated the administrative suit.

 

The judgment indicates that the taxpayer plaintiff works for Compaq Taiwan and earned stock options for purchasing stocks in Compaq USA.  Compaq USA and Compaq Taiwan jointly subsidized the price difference.  As such, the subsidy received by the taxpayer belongs to the bonus he earned for providing service to Compaq Taiwan.  Therefore, the subsidy received is salary income, not offshore income.  Further, the taxpayer plaintiff wittingly declared only NTD1 in his tax return on this income of some NTD15 million.  Certainly he is not allowed to evade his responsibilities.  The Court upholds the NTAT’s decision and dismissed the taxpayer plaintiff’s claim.  The plaintiff may appeal his case. (2005.6)

CYJ/EMA