The Northern District National Taxation Bureau of the Ministry of Finance stated that, in accordance with Article 41, Paragraph 1 of the Securities and Exchange Act, a public company may, upon order of the competent authority (Financial Supervisory Commission), list the portion of the surplus for the current year that has been set aside as a special surplus reserve as a deduction item for undistributed earnings in accordance with Article 66-9, Paragraph 2, Item 5 of the Income Tax Act, but attention should be paid to the relevant regulations of the competent authority.
The Bureau further explained that according to the provisions of Point 2 (II) 2. (2) of the Financial Supervisory Commission's Order No. 1090150022 issued on March 31, 2011, when a public company distributes distributable earnings, it should set aside a special surplus reserve of the same amount as the "current period's net profit after tax plus the amount of items other than the current period's net profit after tax included in the current period's undistributed earnings" for the net amount of other equity reductions incurred in the current period. The net amount of other equity reductions accumulated in the previous period shall be set aside as a special surplus reserve in the same amount from the retained earnings of the previous period. If there is still a shortfall, it shall be set aside from "the net profit after tax of the current period plus the amount of items other than the net profit after tax of the current period included in the retained earnings of the current period", which shall be clearly stated in the dividend policy stipulated in the company's articles of association.
The bureau gave an example, saying that the net reduction in other equity items of Public Company A at the end of 2020 was NT$40 million (the same below), and the net reduction in other equity items at the end of 2021 was NT$50 million, and the special surplus reserve was NT$0. When the shareholders' meeting passed the profit distribution plan in June 2022, a special surplus reserve of NT$50 million was set aside, and when the undistributed profit declaration for 2021 was filed, the aforementioned special surplus reserve of NT$50 million was listed as a deduction item. However, the Bureau found that the net reduction in other equity items incurred by Public Company A in the current period of 2011 was only NT$10 million, and that Public Company A did not specify in its articles of association the method of setting aside special surplus reserves for the net reduction in other equity items accumulated in previous periods. The net reduction in other equity items accumulated in previous periods of NT$40 million should have been set aside as special surplus reserves from the undistributed earnings of previous periods, and was not an amount that should have been set aside from the undistributed earnings of the current period of 2011. The Bureau therefore reduced the deduction items of the undistributed earnings of Public Company A in 2011 by NT$40 million and levied additional taxes.
The Bureau specifically reminds that when publicly traded companies file their retained earnings declarations for each year, if the reported special surplus reserve includes the net amount of other equity reductions accumulated in previous periods, they should pay attention to the dividend policy stipulated in the company's articles of association to avoid affecting the accuracy of the retained earnings declarations for each year. If you still have questions, please visit the bureau’s website ( https://www.ntbna.gov.tw ) to check relevant laws or call the toll-free service number 0800-000321 for inquiries. The bureau will wholeheartedly provide detailed consulting services.
Contact person for press release: Liu, Section Chief, Business Taxation Group Contact phone number: (03) 3396789 ext. 1330
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