Since the revision of the Income Tax Law in 1955, the income tax system of the Republic of China has adopted classical taxation system. After the profit-seeking enterprise income tax is levied on sole proprietorships, partnerships, and companies, then the consolidated income tax is levied on the business income or dividend of sole proprietor, partnership partners, and company shareholders. The collection of the profit-seeking enterprise income tax and the consolidated income tax leads to double taxation of business income or dividend, creating conditions in which enterprises tend to raise funds by means of borrowing rather than fundraising, and causes the company to retain surplus earnings to avoid tax burdens for shareholders, etc., which cannot meet the needs of the country's economic development. In order to create a better tax environment to encourage investment, enhance national competitiveness, and establish a fair and reasonable tax system, the Integrated Income Tax System has been implemented since 1998 and the full imputation credit method has been adopted.
In the Integrated Income Tax System, according to the Article 3-1 of the Income Tax Law, since 1998 the sole proprietor, partners, or individual shareholders of a company are allowed a tax credit for the profit-seeking enterprise income tax paid on profits against their consolidated income tax payable, and a tax refund is available to individuals for any excess of the imputation credit.
In addition, after the implementation of the Integration Income Tax System, since the maximum tax rate of the consolidated income tax is 40%, and the maximum tax rate of the profit-seeking enterprise income tax is 25%, there is a difference of 15 percentage points between the two. In order to narrow the gap between profit-seeking enterprise income tax rate and consolidated income tax rate, and avoid exacerbating the unfairness between companies with applied tax incentive and without applied tax incentive, a 10% profit-seeking enterprise income surtax is imposed on the undistributed earnings of each year.
Since 2015, the full imputation credit of the Integrated Income Tax System has been revised to half of the imputation credit(partial imputation credit method). Since 2018, the MOF adopted a new dividend tax regime, abolished the partial imputation tax system, and revised the surtax rate on undistributed earnings of profit-seeking enterprises from 10% to 5%, in order to establish a competitive tax system in line with international trends.