I INTRODUCTION

Taiwan used to offer lavish tax incentives, mainly tax holidays and income tax credits, to attract foreign direct investment. However, since the expiration of the last tax incentive schemes at the end of 2009, the government has changed its policy and does not offer any significant income tax incentives except for an income tax credit on R&D expenditures.

Instead, Taiwan lowered its corporate income tax rate from 25 to 17 per cent in 2010, among the lowest in the region, to attract foreign investments. While the 17 per cent tax rate may be relatively competitive for a foreign business investing in Taiwan, it does not make Taiwan attractive as a regional holding centre. Not only are offshore dividends remitted to Taiwan taxed, subsequent remittance of the profit from Taiwan also triggers a dividend withholding tax. Taiwan also taxes a company’s retained earnings that are not fully appropriated before the end of the following year.

In addition to the above taxes, Taiwan does not have a comprehensive network of tax treaties. Owing to its political relationship with China and its unique political standing in the world, Taiwan is not recognised as a country by most states. As a result, Taiwan historically could not enter into tax treaties with major economies around the world. However, that has changed in recent years, and Taiwan now has tax treaties with many major economies, including Japan, the United Kingdom, France, Germany, Switzerland, the Netherlands and Australia. However, it still does not have a tax treaty with the United States, one of its largest trading partners.

Again as a result of the political obstacles, Taiwan’s tax authority is relatively isolated from the tax community in the rest of the world. Taiwan is not a member of the OECD. Although the Taiwan tax authority always maintains that it generally follows OECD guidelines and practices, in reality it tends to cherry-pick OECD guidelines in its favour, and in many instances does not follow the generally accepted international interpretation of tax law. The aggressive demand for the withholding tax for cross-border payments outbound from Taiwan is the most notable example of this.

II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT

i Corporate

To conduct businesses in Taiwan, a foreign company often sets up a subsidiary or a branch office in Taiwan.

A subsidiary can be a limited company or a company limited by shares. There is a less onerous administrative and corporate maintenance burden for a limited company. However, if the foreign shareholder needs to carry out merger and acquisition projects in Taiwan, or if the Taiwan subsidiary is a joint venture, then a company limited by shares is more appropriate, because the Taiwan Company Law provides extensive corporate governance guidance for a company limited by shares (the requirements for a limited company are less sophisticated) and only a company limited by shares can participate in merger and acquisition activities under the Company Law and the Business Merger and Acquisitions Law. Effective from 4 September 2015, a new entity type – a closely held company limited by shares – was added to the Taiwan Company Law. The reason behind adding this new variety of company limited by shares is to relax certain requirements of a traditional company limited by shares that assume that such a company will have many shareholders, and that most of these are general and small investors who need statutory protection. For instance, for a closely held company limited by shares, compared to a traditional company limited by shares, the scope of non-cash contributions is broader, there are more approaches to convene a shareholders’ meeting (i.e., a written resolution or video conference is permissible) and profits can be distributed semi-annually (where only an annual distribution is permissible for a traditional company limited by shares).

The foreign company can also set up a branch office in Taiwan to conduct business. Currently, from a business-conducting perspective, a branch is generally the same as a subsidiary. The administrative and corporate maintenance burden for a branch is even lighter than for a subsidiary. However, the main legal concern is that a branch office is part of the headquarters and is not an independent legal entity.

In practice, a branch is more popular because of tax reasons. For example, the profit of a subsidiary is subject to Taiwan corporate income tax (currently at a rate of 17 per cent), but when remitting dividends outbound from Taiwan, a 20 per cent (if no tax treaty exists between Taiwan and the destination country) withholding tax will also be imposed. On the other hand, although the profit of a branch office is subject to the same corporate income tax, there is no dividends withholding tax equivalent when the branch office remits back the profits.

ii Non-corporate

A partnership under the Civil Code is a possible format for a foreign company to conduct business activities in Taiwan. However, this is not a suitable format for a foreign company. A partnership under the Civil Code is not an independent legal entity. It is a contract between individuals or companies. As a result, partners under the partnership contract are subject to unlimited liability. This is one of the reasons why partnerships are not a popular business format. The profit earned by the partners through a partnership will be included as part of the partner’s income and subject to the partner’s corporate income tax rate.

III DIRECT TAXATION OF BUSINESSES

i Tax on profits
Determination of taxable profit

Taxable profits are based on accounting profits and are adjusted for by tax law. Profits are taxed on an accrual basis. In principle, taxpayers are taxed on worldwide-source profit. For any profit-seeking enterprise operating within Taiwan, profit-seeking enterprise income tax shall be levied. For any profit-seeking enterprise with its head office within Taiwan, profit-seeking enterprise income tax shall be levied on its total profit-seeking enterprise income derived from both within and outside of Taiwan. On the other hand, a branch of a foreign company is taxed only on its Taiwan-sourced income.

Depreciation is tax-deductible based on a table of service lives for various categories of assets. Service lives actually adopted cannot be shorter than those in the table, and one-year residual value is required to calculate the annual depreciation. Depreciation methods allowed include straight line, fixed percentage on a declining base, sum of the years’ digits, units of output and service hours. Any other method adopted requires advance approval from the tax authority.

Amortisation of intangibles is provided on the following useful lives:

  • a operating rights: 10 years;
  • b copyright: 15 years; and
  • c trademarks, patents and other franchise rights: the remaining statutory lives.

It should be noted that recognition and amortisation of goodwill is not clearly stipulated.

Capital and income

Generally, all profits are taxed on an actual realised basis with only two exceptions:

  • a Land: gains on sales of land are free from regular income tax but subject to a land increment tax based on a special formula and government-regulated prices. However, starting 1 January 2016, capital gains of foreign nationals derived from the disposition of real estate acquired after 31 December 2015 will be taxed at a rate of 45 per cent for real estate held for less than one year. This rate will be reduced to 35 per cent if the real estate is held for more than one year.
  • b Securities: gains from the trading of securities are generally free from regular income tax but subject to an alternative minimum tax.
Losses

Tax losses are allowed to be carried forward for 10 years. No loss carry-back is allowed under Taiwanese law.

Rates

The current corporate income tax rate is 17 per cent.

Administration

There is only one level of corporate income tax in Taiwan, known as the profit-seeking enterprises’ income tax. An enterprise is required to pay an interim income tax based on 50 per cent of the previous year’s income tax payable in the ninth month of the year. Alternatively, under certain circumstances, an enterprise can choose to pay the interim tax based on the actual operating results of the current year’s first six months.

An enterprise is then required to file an annual income tax return in the fifth month of the following year. The return should be filed along with the simultaneous payment of any taxes due.

Enterprises are encouraged to have their income tax returns certified by certified public accountants (CPAs) before filing. Income tax returns filed with a CPA’s certification are in theory less likely to be chosen for a tax audit by the tax authority. This certification involves a limited audit of the balance sheet accounts and a more extensive audit of the profit and loss accounts.

The tax authority does not have a fixed audit cycle and will only choose targets for audit randomly. The statute of limitations is five years if the tax return is filed on time and no tax fraud is involved.

It is possible to obtain advance rulings from the tax authority for clarification of tax treatments.

There are clear administrative remedy procedures to resolve disputes with the tax authority. In Taiwan, tax litigation cases are handled by two levels of administrative courts, the high administrative courts and the supreme administrative courts.

Tax grouping

Taiwan does not have consolidated tax grouping rules except for financial holding companies, and for companies that have been through a merger, acquisition or spin off executed in accordance with the Business Merger and Acquisitions Law. All group companies with holdings over 90 per cent shall be included if tax grouping is selected. The company’s taxable income and loss are allowed to be offset with each other. Other than that, there is no other meaningful tax benefit under a tax grouping. Basically, this is simply a combination of group companies’ taxable income and loss, and thus is not a true consolidated tax grouping.

ii Other relevant taxes

Other than corporate income tax, business tax is the other major tax of interest to multinational companies doing business in Taiwan. Sales of goods and services in Taiwan are subject to business tax, which comes in two forms: value added tax (VAT) and gross business revenue tax (GBRT), currently at a rate of 5 per cent of gross revenues. GBRT mainly applies to financial institutions and is borne by sellers. VAT applies to other general industries, and is to be collected from buyers of goods and services by the sellers. Sales of certain products and services are exempt from VAT, whereas exports of goods and services are generally entitled to a zero rate of VAT.

Net profit not appropriated before the end of the following year will be subject to a surplus tax on retained earnings at a rate of 10 per cent. As of 1 January 2015, only 50 per cent of this surplus tax paid can be used as a credit against the dividend withholding tax.

IV TAX RESIDENCE AND FISCAL DOMICILE

i Corporate residence

Corporate residence is determined based on where the corporate entity is incorporated regardless of the place of effective management (PEM) under current law.

However, Taiwan introduced a new provision regarding the PEM in July 2016 through the addition of Article 43-4 to the Income Tax Act. Prior to the amendment, only companies incorporated under Taiwan laws will be subject to corporate income tax in Taiwan, and foreign companies will not be taxed in Taiwan unless they maintain a fixed place of business or business agent in Taiwan. With the introduction of the PEM rules, foreign companies will be taxed in Taiwan if they are construed as having their PEM within Taiwan. According to Article 43-4 of the Income Tax Act, foreign companies will be deemed Taiwan tax residents if all of the following conditions are met:

2.1 Decision makers (individual and corporate) for significant operation management, financial management, and human resource management are residents in Taiwan or incorporated in Taiwan; or such decisions are made within the territory of Taiwan;

2.2 Creation and storage or financial statements, accounting records and shareholders’/directors’ meeting minutes are within the territory of Taiwan; and

2.3 Main business activities are executed within Taiwan.

Nevertheless, it should be noted that the effective date of this new provision is still pending.

ii Branch or permanent establishment

Foreign companies can do business in Taiwan through a branch, and will only be taxed on the profit of that branch in Taiwan. The tax will be limited to the branch’s Taiwan-sourced income, and head office expenses can be allocated to Taiwan through a special mechanism.

V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT

Apart from income tax credits granted for R&D, Taiwan no longer offers any tax incentives to attract foreign investment. The government believes the low tax rate of 17 per cent is attractive enough to foreign companies.

Taiwan companies can either get an income tax credit at a rate of 15 per cent of their annual R&D expenditure in the current year, or at a rate of 10 per cent of the R&D expenditure to offset the profit-seeking enterprise income tax payable in the ensuing three years. The R&D tax credit is capped at 30 per cent of the annual taxable income.

VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS

i Withholding on outward-bound payments (domestic law)

All payments of dividends, interest and royalties are subject to a withholding tax at a rate of 20 per cent unless there is an applicable tax treaty that offers preferential withholding rates.

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

No exemption is available for payments of dividends.

Interest payments to foreign governments and interbank interest payments are free from the Taiwan withholding tax.

Royalties paid for the introduction of patents, trademarks and computer programs to 20 designated industries can qualify for an income tax exemption with advance approval from the competent authority.

iii Double tax treaties

Taiwan has entered into 32 tax treaties, and the following table shows the withholding rates applicable under the respective tax treaties as of 31 October 2016. Without a tax treaty, the withholding rates for dividends, interest and royalties are all 20 per cent.

Jurisdiction

Dividends (per cent)

Interest (per cent)

Royalties

Effective

Australia

10, 15

10

12.5

1 January 1997

Austria

10

10

10

20 December 2014

Belgium

10

10

10

1 January 2006

Canada

10, 15

10

10

19 December 2016

Denmark

10

10

10

1 January 2006

France

10

zero, 10

10

1 January 2011

Gambia

10

10

10

1 January 1999

Germany

10, 15

10, 15

10

1 January 2013

Hungary

10

10

10

1 January 2011

India

12.5

10

10

1 January 2012

Indonesia

10

10

10

1 January 1996

Israel

10

7, 10

10

1 January 2010

Italy

10

10

10

31 December 2015

Japan

10

10

10

13 June 2016

Kiribati

10

10

10

1 January 2015

Luxembourg

10, 15

10, 15

10

1 January 2015

Macedonia

10

10

10

1 January 2000

Malaysia

12.5

10

10

1 January 2001

Netherlands

10

10

Nil**

1 January 2002

New Zealand

10, 15

10

10

1 January 1998

Paraguay

5

10

10

1 January 2010

Poland

10

10

3, 10

30 December 2016

Senegal

10

15

12.5

1 January 2005

Singapore

40*

Nil**

15

1 January 1982

Slovakia

10

10

5, 10

1 January 2012

South Africa

5, 15

10

10

1 January 1996

Swaziland

10

10

10

1 January 2000

Sweden

10

10

10

1 January 2005

Switzerland

10, 15

zero, 10

10

1 January 2011

Thailand

5, 10

10, 15

10

1 January 2013

United Kingdom

10

10

10

1 January 2003

Vietnam

15

10

10

1 January 1998

* The total tax imposed on the dividend together with profit-seeking enterprise income tax should not exceed 40 per cent of pre-tax income.

** There is no provision for a reduced withholding tax rate under the treaty.

iv Taxation on receipt

Local dividends from one Taiwan company to another Taiwan company are free from the Taiwan income tax. In Taiwan, dividends are only taxable when they reach the hands of Taiwan individual shareholders or foreign shareholders.

Foreign dividends received by Taiwan companies are subject to the regular corporate income tax at a rate of 17 per cent. Dividends withholding tax paid at source can be used to credit against corporate income tax in Taiwan, but only to the extent of the additional income tax incurred by the inclusion of the foreign dividends in the taxable income.

VII TAXATION OF FUNDING STRUCTURES

i Thin capitalisation

Taiwan has thin capitalisation rules that set the debt-to-equity ratio at 3:1. Only debts from related parties or guaranteed by related parties count, and interest expenses on excessive borrowing are not tax deductible.

ii Deduction of finance costs

The law itself is general and vague. It only stipulates that expenses necessary for the operation of the business shall be tax deductible, and interest expenses are generally regarded as necessary for generating taxable income and are, therefore, tax deductible.

iii Restrictions on payments

Dividends can only be declared from retained earnings. Companies with a cumulative deficit are not allowed to declare dividends.

Ten per cent of annual earnings must be set aside as a legal reserve before the declaration of dividends until the accumulative legal reserve set aside equals the paid-in capital. Certain chartered industries, such as banking and insurance, have higher reserve requirements for setting up various reserves before dividends can be declared.

iv Return of capital

Return of capital is tax neutral. The main barrier to capital reduction is that there might be a minimum capital requirement for some chartered businesses.

VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES

i Acquisition

A foreign company will normally have its existing subsidiary or a newly incorporated special purpose vehicle in Taiwan acquire a majority holding and follow up with a statutory merger with the target. There are two main reasons behind this acquisition structure. The first is to ensure a 100 per cent acquisition. A direct acquisition cannot guarantee a 100 per cent buyout, whereas a statutory merger can legitimately squeeze out the minority shareholders. On the financial side, the acquisition fund can be a mix of capital and intercompany loans, bearing in mind the thin cap rule that sets the debt-to-equity ratio at 3:1.

ii Reorganisation

Mergers and demergers (or spin-offs) are allowed under the Business Mergers and Acquisitions Act and can be executed on a tax-free basis. Shareholders’ dividend withholding tax may be triggered under certain special circumstances. A merger with a foreign company is possible, and will require statutory approval from both sides.

iii Exit

Taiwan law does not permit the change of domicile of a Taiwan corporate entity into a non-Taiwan corporate entity. Thus, if a foreign business decides to relocate from Taiwan, it can only liquidate its Taiwan business and pay whatever tax is due before relocating to another country. Other than the tax liabilities that may be due following the liquidation, there are no additional tax penalties from this process.

IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION

i General anti-avoidance

Controversies and even litigation cases have often arisen in the past when the tax authorities assessed tax liabilities by relying on the ‘form over substance’ principle for lack of a more precise legal basis for its position. To fill that void, the legislature enacted Article 12-1 of the Tax Collection Act on 15 May 2009, which mandates that the application of tax law and regulations shall be based on the concept of taxation by law, taking into consideration the legislative purpose of the relevant applicable tax laws, economic meaning and fair tax in substance. Article 12-1 further stipulates that when construing tax events and objects, the tax authority will base its construction on substantive economic substance and the related ownership and sharing of the substantive economic benefit. Finally, Article 12-1 stipulates that the tax authority shall bear the burden of proof for the application of substance over form.

Taiwan does not have any tax regulations that target low-tax jurisdictions. It does not have controlled foreign corporation (CFC) rules, although the government has considered the idea on several occasions.

ii CFCs

Taiwan introduced CFC rules in July 2016 through the addition of Article 43-3 to the Income Tax Act, which requires a Taiwan corporate taxpayer to include in its taxable income its pro rata share of the taxable profits of its CFC. For the purposes of Article 43-3 of the Income Tax Act, CFCs are defined as corporations established in low-tax territories that are more than 50 per cent owned (directly or indirectly) or dominantly influenced by a Taiwan business entity. Exemptions apply when a CFC has actual business activities in the jurisdiction of its incorporation or its profits do not reach the threshold prescribed by the Taiwan tax authorities. The adoption of CFC rules would eliminate the deferral of taxation on those overseas profits and would discourage businesses from leaving earnings in foreign jurisdictions.

Nevertheless, it should be noted that effective date of this new CFC regime is still pending.

iii Transfer pricing

Taiwan introduced its transfer pricing rules in 2004, which follow the general principles and concepts adopted by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the United States of America Inland Revenue Code Sections 482-1 to 482-6 and their corresponding regulations.

Since then, Taiwan taxpayers are required to explicitly state on their income tax returns whether related-party transactions are executed within an arm’s-length range. However, a comprehensive contemporaneous transfer pricing report will only be required within one month of the receipt of a transfer pricing audit notice from the tax office if the safe harbour threshold is exceeded.

Under the current safe harbour rules, taxpayers will not be required to prepare a comprehensive contemporaneous transfer pricing report if:

  • a their annual turnover is below NT$300 million;
  • b their annual turnover is between NT$300 million and NT$500 million without the utilisation of loss carry-forward or any income tax incentive; or
  • c the total of related party transactions is below NT$200 million.

Advance pricing agreements are available to qualifying taxpayers. An advance pricing agreement is usually valid for three to five years. An extension of up to five years is available.

iv Tax clearances and rulings

The taxpayer can apply for advance tax rulings to secure certainty. No tax clearance or ruling will be required for the acquisition of a local business.

X YEAR IN REVIEW

2017 has been quite a dynamic year for taxation in Taiwan. A series of amendments to the laws were made in response to the OECD BEPS action plans.

First of all, the VAT law was amended, and starting on 1 May 2017, non-resident suppliers of electronic services are required to register and account for the 5 per cent Taiwan VAT.

Second, on 24 July 2017, the Ministry of Finance (MOF) published draft amendments to the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing to introduce OECD’s BEPS Project Action No. 13. Once finalised, the three-tier reporting method began to be applied to the accounting year starting after 1 January 2017.

Then, on 3 August 2017, the MOF announced the proposed Regulations Governing the Implementation of the Common Standard on Reporting and Due Diligence for Financial Institutions (the Taiwan CRS) to keep up with the global trend of improving transparency. The government and financial institutions will be authorised to collect and exchange taxation information with governments of foreign jurisdictions. Financial Institutions will need to establish and implement due diligence procedures and systems to comply with the Taiwan CRS when it takes effect. They should also be ready for the reporting requirements to start in 2020 or later.

Finally, on 1 September 2017, the MOF proposed a Reform Bill of the Income Tax Act (the Bill) to the Executive Yuan. The Bill focuses on three major purposes: easing the tax burden on taxpayers with salary income and mid- and low-level income, easing the tax burden on small enterprises and start-up companies and building a competitive taxation system for investment income. The Bill contains some major amendments and is considered the most significant reform of the Income Tax Act since the implementation of the imputation tax system in 1998.

The tax treaty with China is still pending. With the current impasse between Taiwan and China, it is hard to predict when and whether the treaty will become effective.

XI OUTLOOK AND CONCLUSIONS

We expect the Reform Bill to pass the legislature with minor revisions. After that, we expect Taiwan taxation law to remain stable for the foreseeable future.

1 Michael Wong is a principal partner and Dennis Lee is a senior consultant at Baker McKenzie.