TWSE Press Release

Ministry of Finance (MOF) Announces SBL Taxation Reforms

Publish Date︰2007/08/29 18:08



The Tax Department of MOF announces revisions to SBL trade related taxes with an aim to eliminate double taxation on manufactured dividends and reshape the SBL taxation paralleled the international practice.  Here is a summary of the key points:


1. Manufactured dividends:

-  Business Tax: No business tax shall be levied on manufactured dividends received by lenders.

-  Income Tax: Considerations are given to whether the borrower holds the borrowed shares as of the record date or not.

(1)     The borrower has sold the stocks before record date:

The actual dividends are received by a third party, as such manufactured dividends are not deemed to be the lender’s dividend income but his capital gains.  Capital gains are currently free of tax but shall be subject to the AMT (Alternative Minimum Tax).

(2)     The borrower has not sold the stocks as of record date:

For the borrower, the dividend distribution is regarded as a payment transfer and shall be exempted from income tax.  Since the borrower has paid the withholding tax on dividends to listed companies, only manufactured dividends after tax are redelivered to the lender.  The manufactured dividends are deemed to be the lender’s dividend income levied on par value basis.  The amount (calculated by record date reference price) that exceeds the par value of stock dividends shall be treated as the lender’s capital gains, free of tax so far, but are subject to the AMT.  The applicable tax rate on the dividend income shall be adjusted to the lender’s tax rate.  The borrower is required to report to TSEC on whether the borrowed shares have been sold or not on the record date.  If there is a rate differential due to tax treaty agreement, the lender may reclaim tax deducted by directly applying to the Tax Department with related documents.


2. SBL fee

-  Business Tax: In principal, domestic lenders are liable for business tax with the SBL fee.  When lenders are FINIs, their domestic borrowers are liable.  However, if both parties are FINIs having no permanent establishment in Taiwan, the SBL fee is out of business tax coverage.  Therefore, no business tax will be levied.

-  Income Tax: The SBL fee is considered Taiwan sourced income and is subject to income tax.


3.Overseas lending agent fee on service to FINI lender and FINI borrower

-  Business Tax: If all of the lending agent, the lender and the borrower don’t have their permanent establishments in Taiwan, the lending agent fee received by the overseas agent handling SBL trades is out of business tax coverage.  Therefore, no business tax will be levied.

-  Income Tax: Since both of the lender and the borrower are FINIs, if all of the agency services stated within the agency agreement are proved to be provided offshore, the lending agent fee is not considered Taiwan sourced income.  Therefore, it is not subject to income tax


4. Interest on offshore cash

The MOF clarified that the interest on offshore collateral is not considered Taiwan sourced income.  Therefore, it is not subject to taxes in Taiwan.


5.        Stamp Duty

The MOF clarified that the “letter of entrustment for SBL transaction” and the “contract of negotiated SBL transaction” are out of stamp duty coverage.  Therefore, no stamp duty will be levied.


6. Securities Transaction Tax

- An SBL transaction itself is not like a buy and sell trade, thus is out of securities transaction tax coverage.  No Securities transaction tax will be levied.

- Under the condition that the borrower receives dividends for the loaned positions held as of the record date and redelivers the manufactured dividends to the lender in cash equivalent of which will be considered as sales proceeds received by the lender.  The lender shall be liable for the securities transaction tax at the rate of 0.3% currently.


The TSEC SBL system will be modified in line with these tax revisions.  TSEC will further announce the effective date as soon as the system is ready.  Before that, borrowers and lenders themselves may settle any difference in tax between the paid manufactured dividends and the dividends received from listed companies.  Under the revised tax rules, FINIs will enjoy the reduced taxation on SBL activities.  We hope to attract more FINIs to participate in the market.