National Taxation Bureau of Northern Area (NTBNA), Ministry of Finance stated that profit-seeking enterprises engaged in the business of export and import usually sign contracts of foreign exchange (FX) options with financial institutions to avoid the risks from the fluctuations of FX rate. In accordance with Paragraph 2, Article 24-2 of the Income Tax Act, the provisions of Article 4-1 and 4-2 shall not apply to gains or losses resulting from trading financial derivatives as approved by the competent authority. Such gains or losses shall be included in the amount of income of profit-seeking enterprises in the year of settlement and taxed accordingly after the completion of settlement. However, FX option is a kind of financial derivatives and based on Paragraph 2, Article 24-2 of the Income Tax Act, gains or losses derived from trading of FX options shall be added in the amount of income of profit-seeking enterprises in the year of settlement and taxed accordingly.
The Bureau gave a real example under its examination. Company A was found that it claimed security transaction gains that ceased to be imposed in its profit-seeking enterprises income tax return in the tax year of 2017. Such gains amounted to more than NT$5 million including profits from selling stocks, funds and FX options. According to the documentation provided by Company A, the company signed an FX option contract with a bank and it paid the margin amounted to NT$412,100. Company A had the right to sell US$1 million at the strike price of 31.7 (USD/TWD) after three months. Since the spot price was lower than the strike price, Company A exercised the FX option contract using net settlement and it received NT$900,000 [(31.7-30.8)*1,000,000] which was the subtraction between the strike price and the spot price. The transaction gain after settlement was NT$487,900 (NT$900,000-NT$412,100). Since the FX rate was the transaction objective in this contract, which is not subject to security or future transactions in accordance with Futures Transactions Act, the gain amounting to NT$487,900 which was derived from FX options transaction that Company A conducted shall be taxed and added to the amount of income of profit-seeking enterprises while filing.
The Bureau would like to remind profit-seeking enterprises to be aware that while filing security or future transactions income has ceased to be imposed, the enterprises should identify whether such income is subject to security or future transactions. To avoid paying additional tax payment and penalties, such income shall be added to the amount of income of profit-seeking enterprises. If you have any questions, visit our web site (https://www.ntbna.gov.tw) to refer to relevant regulations or dial toll-free number 0800-000-321. The Bureau will assign a professional to serve you.