See Wage Income Tax (WIT) in the Taxes on personal income section.
There are no special rules at present for equity compensation.
Taxable business profits are determined on the basis of net profits for financial accounting purposes in accordance with International Financial Reporting Standards (IFRS), subject to certain modifications in the TDA. In general, income is assessable when 'receivable', while expenses are deductible when 'payable'. A taxpayer with turnover of less than USD 100,000 may, however, elect to pay tax on a cash basis.
Gross income is defined widely to mean ’any realised increase in economic capacity in whatever name or form which can be used for consumption or to increase the wealth of the taxpayer other than wages that are subject to WIT’.
The gross income for a tax year is the total amount earned by the taxpayer, including, but not limited to, business income, property income, lottery prizes or awards, and refunds of tax payments previously deducted as an expense.
Capital gains are treated as business income.
Dividend income is tax exempt (see Exempt income below).
Interest income is treated as business income.
An individual paying rent is not required to withhold tax. Instead, the rental payment recipient is required to 'withhold' tax at 10% from the gross amount received.
The following income is tax exempt:
- Any aid or donations, provided the donor and recipient do not have any business or control relationship.
- Gifts received by relatives within one degree of direct lineage, or by a religious, educational, or charitable organisation, provided that the donor and recipient do not have any business relation or control relationship.
- Assets (including cash) received by a resident in exchange for shares or a capital contribution.
- Any amount paid by an insurance company to a resident in connection with health, accident, life, or education.
- Any contribution paid by an employer or employee to an approved pension fund.
- Income derived by an approved pension fund.
- Remuneration received for services provided by a natural person (individual) if the remuneration is financed out of the Trust Fund for East Timor.