The Executive Yuan on Thursday approved draft amendments to the Business Mergers and Acquisitions Act (企業併購法), aiming to encourage companies to consolidate and form industrial holding entities to improve international competitiveness, while mitigating shareholders’ tax burdens when setting up such firms. The proposed amendments would be submitted to the Legislative Yuan for further deliberation.
The proposals come as many Taiwanese small and medium-sized enterprises are facing growth bottlenecks during critical business transformations or external challenges — such as tariffs and geopolitical conflicts — and are seeking ways to improve their operational efficiency and international competitiveness. Some of them have sought to establish an industrial holding company through consolidation, to integrate human resources, finance, manufacturing, technology and brands, as well as share risks and costs, improving their bargaining power and international adaptability.
However, when an industrial holding company is formed through share swaps among companies, shareholders often have to pay income tax on securities transaction gains arising from share conversions for the year in which the share swap occurred, even though they have yet to dispose of the shares. This immediate tax burden dampens companies’ willingness to establish holding companies. The proposed amendments aim to strike a balance between protecting tax revenue and encouraging the formation of industrial holding companies by allowing shareholders to defer their income tax reporting obligation until the date when they dispose of the industrial holding company’s shares.
To avoid the abuse of the deferred income tax policy, the new measure only applies to an acquiring company that is recognized by the National Development Council as an industrial holding company. The council last week said it expects at least 15 industrial holding companies to be established within five years of the amendments passing. Local media reported that companies in the machine tool industry would likely be among the first to form industrial holding companies to integrate firms’ resources amid increasing trade headwinds.
Washington’s 20 percent tariff on Taiwanese goods — higher than the 15 percent rate for Japan and South Korea — has sent shock waves through traditional industries, with reports of some machine tool makers beginning to cut back weekly work hours. Based on government-backed think tanks’ analyses, the US’ “reciprocal” tariffs, on top of existing “most-favored nation” duties and other levies, are estimated to affect about 10 percent of Taiwan’s exports to the US. That would have a limited effect on Taiwan’s overall exports in the short term, but might have a significant impact on certain traditional industries already facing exchange rate pressure.
For a long time, small and medium-sized companies in Taiwan’s traditional industries, such as those producing machine tools, molds, plastic products and electronic materials, have often faced technological and scale disadvantages, making them unable to effectively compete with high-end products from Japan and South Korea, nor with Chinese manufacturers in the mid and low-end markets. The latest US levies add extra pressure, making the formation of a holding company a possible solution, as it enables small firms to achieve economies of scale, boost their research capability and enhance market competitiveness.
Government subsidies and other response measures such as tax exemptions and labor benefits are only short-term solutions to the predicament facing Taiwan’s export-oriented traditional industries. Helping affected businesses transform and upgrade their businesses, diversify abroad and explore new markets, and adjust the nation’s economic structure should be the government’s top strategic priority in the medium-to-long term.
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