Significant Tax Incentives for Shareholders in a Venture Capital Firm Being Considered

A new proposal is being considered which if passed will make venture capital firms in Taiwan a very attractive vehicle for making direct investments. The proposed plan is to provide the corporate shareholders (i.e. shareholders that are corporations) of venture capital firms with an investment tax credit equal to 20% of their investment. Under existing Taiwan law, a corporation does not pay profit taxes on the dividends repatriated due to its investment holdings. A corporate shareholder of a venture capital firm may use this tax credit to offset taxable income, which is on top of the benefit that there is no tax on received dividends.

Investment tax credit is not a new creation in Taiwan and has been applied in certain new and strategic sectors where incentives are considered beneficial to the strategic development of the economy as a whole. Venture capital firms many years ago were considered such a strategic sector and their shareholders were able to enjoy such benefits. However, in a subsequent amendment of the law, the venture capital firms were taken off the list. Since then, venture capital firms in Taiwan fell out of favor. Recently, the subject appears to gain momentum. In order to encourage the formation of capital and promote investment in the country, the consensus among the governmental authorities is being built, understanding the vital role of venture capital in stimulating the development of innovative technologies which may in turn drive the economy of this country.