Taiwan Delays Tax On OBU Structured Notes For Six Months

by Mary Swire, Tax-News.com, Hong Kong

06 January 2010

Taiwan’s Ministry of Finance (MOF) has delayed for six months the imposition of a tax, which was due to begin on January 1, 2010, on investment gains made on trading in structured notes through offshore banking units (OBUs).

OBUs constitute a significant sector in Taiwan’s financial system. They are permitted to undertake foreign currency denominated transactions only, offering services mainly to non-residents.

At the end of September 2009, there were 63 OBUs in Taiwan, established by both Taiwanese and foreign banks, with combined assets amounting to USD96bn. Their turnover of derivative products trading in that month was some USD21.4bn.

OBUs are exempt from reserve requirements, business income tax and stamp duties, while income paid to non-residents is also exempt from withholding tax. Unless required by court order or law, any client information is not disclosed to third parties.

However, the MOF had decided last year to impose, from January 1, 2010, a 15% income tax on gains made by individuals or institutional investors through trading in structured notes via OBUs.

Structured notes are fixed-rate deposit products that create possible higher returns, with or without principal protection, by embedding various forms of financial derivatives based, for example, on credit, commodities and foreign currencies.

The MOF revealed that the six-month delay to the tax has been put in place in order to allow time for banks to make the necessary modifications to their computer systems.

However, it has also suggested that the Financial Supervision Commission (FSC) looks to an amendment in parliament of the Offshore Banking Statute to regularize a permanent exemption for OBUs from such a tax.

The FSC has recommended the continuation of the tax exemption in order to protect the competitive situation of OBUs in Taiwan for structured investments (compared, for example, to Singapore and Hong Kong).

However, it has been reported that if an amendment is not ratified by parliament within the six month period, the MOF will confirm the tax and it will then be effective from July 1, 2010.

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