Author: | Published: 3 Apr 2003
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Though Taiwan is well known for its competitiveness in the hi-tech sector, many companies - whether in the hi-tech industries or in traditional industries such as textile, cement and food manufacturing - are noticeably loosing ground in the world economy. To keep pace with the industry leaders, many Taiwanese companies have, via merger or acquisition, tried to improve their own competitiveness while achieving external growth.

Arguably, the M&A trend in Taiwan began in 1999 when United Microelectronics Corporation (UMC) unanimously approved the merging of three joint venture companies and one publicly traded entity into UMC. Since UMC's merger, there have been many mergers and acquisitions involving well-known Taiwanese companies such as Acer Corporation, AU Optronics Corporation, Taiwan Semiconductor Manufacturing Company and Fubon Financial Corporation.

Though there are business advantages, such as synergy and economy of scale, with M&A deals, sizeable tax liabilities and burdensome administrative matters acted as a disincentive. To motivate Taiwanese companies to improve their competitive edge in the world economy, the Legislative Yuan has promulgated numerous laws and regulations over the last two years. One of these was the Corporate Merger and Acquisition Law (M&A Law). Mergers and acquisitions may now have become attractive tools for Taiwanese companies looking to strengthen their businesses.

As well as providing a more simplified administrative process, the new M&A Law provides tax incentives for qualified M&A transactions. This article will provide a general summary of the incentives, as well as identify the tax-related uncertainties that may arise when applying the M&A Law.


In general, on a sale or exchange of shares transaction, such as share purchase or share swap, a security transaction tax at 0.3% of the transaction amount will apply; capital gain, if any, is specifically exempted by Article 4-1 of Taiwan's Income Tax Law. Though the tax liability is relatively small for share sale or exchange transactions, the acquiring party is also required to assume the target party's liabilities, known or unknown. So to minimize the liabilities assumed, many companies may prefer to use an asset purchase approach instead. However, before the M&A Law, upon a transfer of assets, the applicable Taiwanese taxes - for example the income tax, business tax, land value increment tax and deed tax - can be sizeable. In addition, in a transfer of asset transaction, any unused net operating losses or tax credits of the target company cannot be carried forward to offset any future income of the acquiring company. Thus the inability to lower the tax burden in an asset transfer transaction may have deterred Taiwanese companies from doing mergers or acquisitions.

However, since the enaction of the M&A Law, companies can now save substantial tax dollars, provided that the M&A transaction (including asset acquisition) will qualify for the tax breaks provided. Effective usage of the M&A Law can help to reduce potential tax liabilities and transaction costs as well as facilitate the M&A process as a whole.


In general, the M&A Law can apply to local as well as cross-border M&A deals, meaning both domestic and foreign companies can enjoy the tax incentives. However, companies must satisfy certain criteria to realize these benefits.

Per the M&A Law, certain types of transactions - those involving acquisitions of substantial assets and/or shares, share swaps involving all of the issued shares of a given company, mergers or consolidations, and spin-offs of independent business unit or operations - may qualify for tax-free treatment prescribed. Other M&A transactions - using only cash as consideration for share purchase, acquiring only a limited portion of shares, assets or business, or spinning off a non-independent business operation - will not qualify for the tax incentives.

The main rationale for tax-free treatment is that target shareholders will retain a continuing equity interest in the surviving enterprise after a qualifying merger or acquisition. In essence, since there is no material change in ownership, it is deemed that there is no taxable event. After satisfying the merger or acquisition structure prescribed by the M&A Law, the following tax incentives may apply:

In a qualifying M&A transaction, if no less than 65% of the consideration paid to the target company or target company's shareholders is in the form of voting shares of the acquiring company, all stamp tax, deed tax, securities transaction tax and business tax payable deriving therefrom may be exempt. Furthermore, any applicable land-value increment tax may be deferred until the subsequent sale of such assets. However, this deferral will not lower the overall tax liability associated with subsequent transfers or sales of the assets.

The goodwill, if any, generated from a qualifying merger or acquisition may be amortized within a 15-year period. The expenses incurred from engaging in the transaction may be amortized within a 10-year period. Amortizing goodwill and/or deducting expenses incurred from the transaction may cause accounting basis and tax basis to differ.

In a qualifying M&A transaction, the surviving or acquiring company is entitled to any unused and un-expired investment tax credit belonging to the target in relation to the acquired assets or business. However, the surviving or acquiring company can only use such investment tax credit to the extent of the portion of its income tax payable attributable to the acquired assets or business.

In a merger, a portion of net operating losses of the dissolved company can be carried over to the surviving company. According to Article 38 of the M&A Law, after the merger, the surviving or newly created company may inherit the net operating losses of each of the participating companies respectively in proportion to the share percentage in the surviving/newly created company held by each participating company after the merger.

The capital gain on transfer of the acquired company's entire or substantial portion of assets can be exempt from income tax if not less than 80% of the consideration of the purchase is paid in the form of voting shares in the acquiring company that are transferred in their entirety to the shareholders of the acquired company. Any loss incurred related to the transfer of assets should be disallowed for deduction purposes. This tax incentive applies only to local companies.

If as a result of a merger, spin-off or substantial asset acquisition, a local company holds at least 90% of shares in one local subsidiary, and the holding period is a consecutive 12 months of a given taxable year, this parent company can file a consolidated income tax return without prior approval from the Ministry of Finance (MoF). This tax incentive applies only to local companies.

If in a substantial asset/business transfer M&A for share consideration, the value of the acquired shares is lower than the book value of the business or assets exchanged, the acquired company can amortize the loss from such transaction within 15 years.

Knowing what tax breaks are available, companies can structure the M&A transaction accordingly to enjoy the tax incentives provided by the M&A Law.


The M&A Law provides an anti-abuse clause that governs any transaction between a company and its subsidiary, any domestic or foreign individual, profit-making business or education, culture, public interest, charities or organization. Specifically, if it is determined by the Taiwan tax authority that a merger or acquisition is conducted in an non-arm's length manner or is undertaken with the intention to avoid certain tax obligations, the Taiwanese tax authority can, with the approval from the MoF, make the applicable reassessment to the tax obligations according to that of an arm's length transaction or that calculated from the results of investigation to accurately compute the actual income tax liability.


Because of the lack of a precedent, or clear rules and regulations, companies may encounter many uncertainties when applying the M&A Law. Furthermore, there is also a lack of sufficient precedents and explanations from the Taiwanese tax authority to provide a proper guidance. Some examples of the uncertainties are:

  • In general, the M&A Law is designed mainly for M&A transactions among Taiwanese companies, but is also applicable to foreign companies engaging in deals with Taiwan companies. However, the M&A Law does not otherwise provide specific regulation on extraterritorial application;
  • Methods of filing consolidated returns;
  • Methods of calculating the net operating losses or tax credits to be inherited by a surviving/newly created company; and
  • Definitions of certain terms within the M&A Law. For example, the 65% share consideration requirement is unclear as to its meaning on "an individual-by-individual" basis or on "an as-a-whole" basis. The scope of amortizable expenses related to M&A is also vague.


In 2003, in the midst of a recession, there are many M&A opportunities in Taiwan. Using the tax incentives prescribed in the M&A Law, the government would like to motivate Taiwanese companies to conduct M&A transactions. However, the uncertainties and the lack of guidance in applying the new M&A Law pose an obstacle the companies have to overcome. Whether the M&A Law will be an effective tool for Taiwan's government to stimulate the economy and improve the competitiveness of Taiwanese companies remains to be seen.

About the authors

Eric Tsai

Puhua & Associates

Eric Tsai is managing partner of Puhua & Associates, the correspondent law firm of Pricewaterhouse-Coopers Taiwan, and senior legal counsel of Pricewaterhouse-Coopers Taipei.

Eric specializes in company law, securities law, tax law, and labor law. His broad experience in planning, structuring and implementing domestic and cross-border projects enables him to develop innovative approaches in a wide range of industries for an expansive list of clients - from high growth entrepreneurs to established market leaders. These projects include international investment, joint ventures, financial services and hi-tech corporate transactions.

Eric is admitted to the Taiwan Bar Association and the New York State Bar Association. Being active in the legal and business communities, he has authored various legal and business articles. He is fluent in English, Mandarin and Taiwanese.

Peter Su

Puhua & Associates

Peter Su is the senior tax consultant of Puhua & Associates, the correspondent law firm of Pricewaterhouse-Coopers Taiwan, and a senior tax manager of Pricewaterhouse-Coopers Taiwan.

Peter is a certified public accountant who joined Price Waterhouse Taiwan in 1997. He has extensive knowledge of local tax laws and regulations in various Asian countries, and specializes in international and local tax planning/structuring for various multinational companies in the hi-tech, pharmaceutical, semiconductor and automobile manufacturing industries. Peter also advises multinational and local clients on M&A tax structuring.

Peter became a certified public accountant in the State of California in 1996. Being active in the business communities, he has authored various business articles. He is fluent in English and Mandarin.

Puhua & Associates
12/F 460 Hsin Yi Road, Sec. 4,
Tel: +886 2 2729 6687
Fax: +886 2 8788 4501
Email: eric.tsai@tw.pwcglobal.com