Introduction and Comparison of Tax Benefit Application for Foreign Companies Earning Taiwan-Sourced Income
Chapter 1: Overview of Tax Issues for Foreign Companies in Taiwan
Foreign companies earning Taiwan sourced income often face specific tax considerations that require attention. To elaborate, Taiwan's Income Tax Act provides various tax incentives to alleviate the tax burden on foreign enterprises. Among them, the two primary tax incentives commonly applied when there is no tax treaty between the foreign company’s home country and Taiwan, which is: (1) Article 25 of the Taiwan Income Tax Act and (2) Article 15-1 of the Guidelines for the Determination of Income from Sources in Taiwan in accordance with Article 8 of the Income Tax Act.
(1) Article 25 of the Taiwan Income Tax Act (hereinafter as “Article 25 application”)Legal Basis and Scope of Application
Article 25 of the Taiwan Income Tax Act stipulates that under certain conditions, foreign companies may enjoy certain tax incentives. According to this provision, foreign companies engaged in specific business activities in Taiwan, such as international transport, construction contracting, providing technical services, or machinery and equipment leasing, may benefit from lower effective tax rates to promote international economic cooperation with Taiwan.
Application Requirements and Tax Benefits
- Application Requirements: All foreign companies with headquarters located outside Taiwan are eligible to apply, regardless of whether they have established a fixed place of business (such as a branch) or have a business agent in Taiwan.
- Tax Benefits: The specific tax reduction may vary depending on the particular business activity. Generally, for those providing technical services, the effective tax rate can be reduced from 20% to 3%.
Advantages and Disadvantages
- Advantages: This tax benefit application is relatively simple to apply for, and the review time of the tax authority basically is also shorter.
- Disadvantages: Article 25 application only applies to four specific types of abovementioned business activities. Kindly note that general administrative management and royalty income does not qualify for this tax benefit application.
(2) Article 15-1 of the Guidelines for the Determination of Income from Sources in Taiwan in accordance with Article 8 of the Income Tax Act (hereinafter as “Article 15-1 application”)
Legal Basis and Scope of Application
Article 15-1 application is applicable to certain types of Taiwan-sourced income obtained by foreign companies, such as service remuneration or business profits. By applying for the tax benefit application in advance, foreign companies can reduce their tax burden.
Application Requirements and Tax Benefits
- Application Requirements: Foreign companies must provide relevant supporting documents (such as the company's main business activities, transaction details, and income types) to the tax authorities for the approval of the applicable net profit rate and domestic profit contribution ratio.
- Tax Benefits: Typically, the net profit rate is determined according to the industry standard prescribed by the government (each industry varies, for example, the net profit rate for E-commerce platform service is generally 30%). Assuming the domestic profit contribution ratio is 100% (proof of foreign contribution ratio would require additional evidence), the effective tax rate can be reduced from 20% to 6%.
Advantages and Disadvantages
- Advantages: Article 15-1 application allows different kinds of income to be applied, one of the main application requirements is to proof that the received remuneration belongs to the foreign company's main business activities. The application process is also relatively simple.
- Disadvantages: The review time for the application can be longer, depending on the tax authorities' current audit trend Furthermore, the tax authorities may not always agree with the applicant’s opinion on the applicable industry net profit rate, which requires time for negotiation and communication.
Summary
Foreign companies should choose suitable tax incentive policies based on their business model, income type, and long-term investment plans. For companies with diversified operations and long-term investment plans, Article 15-1 application might be more suitable. Conversely, for companies obtaining specific types of Taiwan sourced income, Article 25 application provides clear and straightforward tax incentives.
