Taxes on Stock Given to Taiwanese Employees Abroad – The Cases of China and the Netherlands

Following the gradual development and spread of the global deployment business model, leading Taiwanese companies have had to dispatch important personnel abroad to serve in long-term positions at affiliated companies, helping to carry out integrated group-wide planning. To motivate such employees, companies often issue employee stock bonuses and options, in addition to cash rewards. How, then, should one tax the stock received by expatriate employees from Taiwan? Should either the Taiwan company or the overseas company have a local withholding obligation for such employee bonuses? Companies and their employees both have a keen interest in these questions.

Also, as the international trend to counter tax evasion has gathered pace, countries have been strengthening their legislation and audit procedures targeted at tax evasion on the part of foreign employees. Mainland China, for example, takes very seriously underreporting of personal salary income by foreigners employed by foreign investors, so on March 5 2004, Notice of the State Administration of Taxation No 27 (2004) was issued requiring foreign employees or obligated tax withholders to take the initiative and report unpaid taxes from previous years. Those who fail to pay or who underpay are to be regarded as criminals who will be prosecuted and punished under the law. In the Netherlands, meanwhile, the government recently issued a new rule saying that when foreign companies provide their expatriate employees or local employees stock bonuses, tax must be withheld and paid to the Dutch government. Otherwise, fines will be imposed equaling 30% to 100% of the amount owed, plus interest. Measures such as these give a hint of the larger, ongoing trend.

In Taiwan, stock bonuses may not be claimed as a business expense.

Under current regulations in Taiwan, stock bonuses are after-tax distributions that cannot be claimed as a business expense. Article 240, paragraph 4 of the Company Act states: "Where a distributable bonus is to be capitalized… the bonus distributable to the employees under the articles of incorporation may be paid either in the form of shares newly issued for such purpose or in cash." Hence, when a company uses its surpluses to issue stock bonuses or cash bonuses to employees, in terms of the company’s overall financial picture, it does not really incur any actual cost or expenditure. Also, there is Article 64 of the Business Accounting Act which states that the distribution of a business’s surplus, be it as share dividends, bonuses, etc., may not be counted as an expense or loss, so Taiwan-based companies may not claim stock bonuses as a business expense.

Taxes on employee stock bonuses received in Mainland China

According to Mainland China (PRC) income tax law provisions, stock bonuses issued by companies in Taiwan and received by employees working in the mainland area are considered to be PRC-source income and must be taxed along with wage and salary income. However, there is still a dispute in practice over whether they should be taxed based on their face value or their market value when they are received. Article 10 of the "Regulations for the Implementation of the Individual Income Tax law of the People's Republic of China" states that where "income is in the form of physical objects, the amount of taxable income shall be determined according to the price specified on the voucher obtained. If there is no receipt for the physical objects or if the price specified on the voucher is obviously on the low side, the tax authorities in charge shall determine the amount of taxable income by reference to the local market price; If the income is in the form of negotiable securities, the amount of taxable income shall be determined by the tax authorities in charge according to the face value and the market price. Therefore, in practice, it would seem that an employee could use either the face value or the market value when filing, but the tax authority has the right to review and decide for itself. We recommend the conservative approach: Use the market price for tax filing purposes, since in most situations the market price will be greater than the face value.

On another point, where the Taiwan company and the one on the mainland are affiliated enterprises, then when the Taiwan entity distributes the stock bonuses, the mainland affiliate must withhold and declare tax on them.

Latest developments on stock bonuses for employees assigned to the Netherlands

Below are the latest measures and regulations adopted by the Netherlands for where foreign companies give stock bonuses to their own nationals or local employees in the country, and companies fail to withhold and file income tax, or individuals do not fulfill their obligation to report and pay tax on such income.

1. Penalties for not truthfully filing taxes on salaries in the Netherlands
   Based on current tax law in the Netherlands, if an employer in the Netherlands knows an employee receives an employee stock bonus from a Taiwan parent company, the Dutch employer has a responsibility and obligation to withhold and pay wage tax along with national insurance contributions.
   
   In practice, the Dutch Tax Office maintains that employers must know that employees receive bonuses from Taiwan parent companies, so the employee’s taxes must be withheld in accordance with regulations. If the bonuses issued by the Taiwan parent company are not included in the Dutch subsidiary’s wage and tax reporting system, the Dutch employer will face major legal and tax liabilities.
   
   In the Netherlands, back taxes may be sought for a period of up to five years, but in the case of internationally assigned personnel, that period may be extended to 12 years. Thus, once the Dutch Tax Office discovers that a Dutch company has underpaid wage tax and social security/insurance contributions, it will be subject to payment of the taxes owed, plus interest and fines. In some cases, the fines may equal half the total bill, so employers cannot be complacent.
   
   
2. The Netherlands tax authorities are already actively exchanging information with other tax authorities overseas.
   With increasing aggressiveness, the Netherlands is building ties with foreign tax authorities, especially those in countries, like Taiwan, with which it has signed tax agreements and routinely exchanges related information. The Dutch Tax Office pays particularly close attention when foreign public companies issue employee stock options or stock bonuses so that it can discern whether or not any such stock has been issued to employees who work and reside in the Netherlands, but which has not been included in their employer’s wage and tax system.