The Taipei National Tax Administration (TNTA), Ministry of Finance indicated that when an employee, hired by a subsidiary, branch or representative office of a foreign company operating within the territory of the ROC, obtains then exercises the employee stock options issued by the foreign company, the difference that the market price of the stock on the exercise day exceeds the exercise price shall be considered as other income of that employee in that exercise year, and the individual income tax shall be levied accordingly. However, such difference shall not be recognized as the losses or expenses of an enterprise.

The TNTA indicated that according to the Explanatory Decree No. 09404528910 on May 17, 2005 and No. 09404527550 on May 17, 2005 enacted by the Ministry of Finance, if a subsidiary, branch or representative office rewards its employees with stock options issued by its foreign parent/head company, the compensation cost of the given stock option may be recognized as salary expenses of the enterprise in the year that the employee stock option being exercised according to Article 71 of the “Guidelines for Examination of Profit-Seeking Enterprise Income Tax”; and the information and income with respect to the individual exercising the employee stock options during the preceding year shall be reported to the competent tax authority prior to the end of January of each year. However, when an employee exercises the options based on the stock option plan of the enterprise, the difference that the market price of the stock on the exercise day exceeds the exercise price shall be classified as other income of that employee, instead of the losses or expenses of the enterprise.

The TNTA further explained the regulation by giving an example, Company A reported its salary expenses of NT$ 140,000,000 when filing its profit-seeking enterprise income tax return, then the CPA of such company additionally added NT$20,000,000 to its salary expense as an off-balance sheet adjustment. After examination, the recognition of such adjustment is based on the difference of the exercise price and the actual market value on the day the option was exercised which is related to employees obtained the stock options and then exercised it in relation to the stock option plan offered by the foreign parent company; however, because company A had already recorded the compensation cost of the stock options issued by the foreign parent company according to their market value and recognized it as salary expenses, the difference that the market price of the stock on the exercise day exceeds the exercise price, thereafter, shall be considered as other income of those employees instead of the losses or expenses of the company. Therefore, in accordance with the aforesaid Explanatory Decree, the TNTA excluded the salary expenses of NT$ 20,000,000 added by the off-balance sheet adjustment and an additional tax due of $NT 3,400,000 was required.

The TNTA reminded that the difference between the exercise price and market price of the stock shall be other income of the individual instead of the losses or expenses of an enterprise. While reporting the losses and expenses, the profit-seeking enterprises shall pay attentions to the Income Tax Act and relevant regulations so as not to be subjected to additional tax due.