Tax Reduction through Investment of Undistributed Earnings

According to Article 23-3 of the Industrial Innovation Act and its subordinate regulations, for-profit businesses can deduct undistributed earnings invested in the construction or acquisition of buildings, hardware and software equipment, or technology used for self-production or business purposes, as long as the actual expenditure reaches 1 million. This deduction allows them to avoid an additional 5% tax on undistributed earnings. This provision has been in effect since the declaration of undistributed earnings in 2018 and will continue until December 31, 2028. The key points and considerations regarding the application of this provision are explained as follows:

I. Scope of investment projects:

Construction or acquisition of buildings, hardware and software equipment, or technology for self-production or business purposes. Excludes land and equipment not capitalized on the accounts. Excludes lease improvements made to properties leased from others. Businesses can review their accounting policies and adjust their capitalization policies within the legal framework to meet the opportunities for deduction of undistributed earnings.

II. Investment amount:

– The total actual expenditure minus government subsidies must reach 1 million. Excludes input tax amounts already offset against deductible tax items.

III. Purpose of investment:

For self-production or business use. Investments made for purposes other than self-use, such as providing them to foreign subsidiaries, are not eligible for the deduction of undistributed earnings.

IV. Investment period:

Within 3 years from the year following the occurrence of the surplus. It is important to ensure that the payment date falls within the required 3-year period; otherwise, the deduction cannot be claimed. For example, if Company A generates a surplus in 2018 and makes an investment in machinery and equipment within the following 3 years (2019 to 2021), but a portion of the payment is made outside this period (e.g., in 2018 or 2022), that portion cannot be considered as a deduction from the undistributed earnings of 2018.

V. Determination of investment date

For buildings: the date of issuance of the occupancy permit, ownership registration, or receipt. For hardware and software equipment: the delivery date. For technology: the date of acquisition. In the case of phased construction or partial delivery, the acceptance date of each phase of construction or the delivery date of each batch of equipment is considered.

Vl. Declaration procedure:

No prior application is required if the requirements are met. Only when filing the undistributed earnings declaration, the prescribed forms and supporting documents (such as invoices, contracts, payment receipts, etc.) need to be submitted for the tax authorities to review and approve the deduction amount. If the investment date falls after the declaration of undistributed earnings, an amended application for tax refund can be filed within 1 year from the completion of the investment. The completion of investment is determined based on the last investment date within the prescribed 3-year period

Example: Company A has undistributed earnings of 1.2 million and 1.8 million in 2018 and 2019, respectively. They invest 3 million in qualified machinery and equipment from the surplus of 2019, which is delivered and paid for on April 1, 2021. The portion of the investment related to the surplus of 2019 (1.8 million) can be included as a deduction in the undistributed earnings declaration for that year. The portion related to the surplus of 2018 (1.2 million) can be amended and added to the undistributed earnings declaration for 2018 within 1 year from the completion of the investment (starting from April 1, 2021). Any excess tax paid will be refunded. (Source: Ministry of Finance)

Vll. Penalty:

If within 3 years after the declaration, the invested items are transferred, leased, resold, returned, or the original intended use is changed, additional taxes and interest will be imposed.

In conclusion, for-profit businesses should carefully plan significant capital expenditures for each year and make full use of retained earnings to maximize tax savings.