By Hung Ou Yang and Paul Ma
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Under the Taiwan Income Tax Act, in general, an income with its source in Taiwan shall be taxed at the applicable withholding tax rate of 20%. Since the foreign enterprises will be unable to deduct its cost and expenses in most situations, the tax payable of the foreign enterprises would be calculated based on the amount of gross income. For foreign enterprises, such regulations unfortunately would cause a significant tax burden and lower their motivation to do business with Taiwanese trade partners. We hereby provide a solution for getting tax benefits in compliance with the Taiwan Income Tax Act.
To solve such unreasonably high tax burdens, Article 25 of the Taiwan Income Tax Act ("Article 25") granted certain tax benefits to foreign enterprises engaging trades in several business fields: international transport, construction contracting, providing technical services, and leasing machinery/equipment. A qualified foreign enterprise who falls into the scopes of the specified business fields may apply for the tax benefits, obtaining a more favorable effective tax rate for its Taiwan-sourced income in terms of calculation. Once approved by the Taiwanese Tax Bureau, the tax payable of the transactions conducted by the applicant can be calculated by a 10% or 15% profit ratio alongside with 20% withholding tax rate. For example, when a foreign enterprise earns NTD 1,000 Taiwan-sourced income, its profits will be deemed as NTD 100 or NTD 150 if approved by the Taiwanese Tax Bureau. Here, the withholding tax the foreign enterprise has to bear will be 20% of NTD 100 or NTD 150, rather than 20% of NTD 1,000 when there is no such Taiwanese Tax Bureau's approval. Therefore, in this hypo, the foreign enterprise may enjoy an effective tax rate down to as low as around 2% or 3% eventually.
Requirement for Applying Tax Benefits
1. Qualified Applicant
Any profit-seeking enterprise (including sole proprietorship, partnership, company etc.) having its head office outside the territory of Taiwan (collectively referred as to "foreign enterprise" in this article) will be qualified for applying for the tax benefits of Article 25, regardless of whether or not such foreign enterprise has a branch office or business agent in Taiwan. However, the enterprises based in Mainland China are directly excluded from the tax benefits under Article 25. Moreover, even though the enterprises based in tax havens are not clearly disqualified under Article 25, the Taiwanese Tax Bureau tends to strictly review their applications and rejects to approve them if there is any tax avoidance concern.
2. Applicable Trade Categories
According to Article 25, the tax benefits apply to only 4 categories of trades including:
a. International Transport, including marine and air transport,
b. Construction Contracting, including constructions related to architecture, installment, electric and mechanical engineering, and river dredging,
c. Providing Technical Services, including planning, design, installment, examination, maintenance, consulting, certification and personnel training etc., and
d. Leasing machinery/equipment, regarding production machinery, transportation equipment, ship, aircraft, container etc.
3. Difficulties in Calculating Cost and Expenses
The tax benefits will be granted only when the cost and expenses of the Taiwan-sourced income are difficult to calculate. For example, if the qualified foreign enterprise sends a professional to Taiwan providing not only technical installation but also consulting services, there probably will be a situation where it is difficult to record how much time this professional devote himself to a specific service provided. Here, the qualified foreign enterprise can claim that the cost and expenses of the income cannot be precisely calculated accordingly. Therefore, the applicant shall elaborate such difficulty in calculating the cost and expenses of its Taiwan-sourced income to the Taiwanese Tax Bureau.
Required Documents
1. Application forms. It should be noted that each application form can be used to only one trade contract in principle.
2. The copy of the valid, signed trade contract. A Chinese translation of the contract will be required if there is only an English version of the contract.
3. POA if applying through an agent.
Getting Tax Benefits
According to Article 25, once the application approved, the taxable profit shall be 10% or 15% of the gross Taiwan-sourced income. Therefore, the final tax payable would be reduced down to as low as 2% or 3% of the gross income.
|
Categories of Trade |
Profit Ratio |
Withholding Tax Rate |
Effective Tax Rate |
|
International Transport |
10% |
20% |
2% |
|
Construction Contracting |
15% |
20% |
3% |
|
Providing Technical Services |
15% |
20% |
3% |
|
Leasing Machinery/equipment |
15% |
20% |
3% |
As the above diagram shows, with the application of Article 25, the foreign enterprise may enjoy an effective tax rate of 2% or 3%, which is relatively low, in comparison to the original withholding tax at the tax rate of 20% based on the gross income.
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Tips for Article 25 Application
The purpose of Article 25 is to motivate international trade by giving tax benefits. The Taiwanese Tax Bureau tends to reject the application for the following reasons since the they are inconsistent with the purpose Article 25.
1. When the income obtained may be certain kind of royalty, regardless of deriving from any copyright, patent trademark, brand, model, trade secret, know-how, or franchise etc.,
2. When a cross-border group may use the tax benefits to lower the tax burdens of its internal payment between affiliates,
3. When labor dispatch services may be involved, OR
4. When services from foreign practitioner of profession, such as foreign lawyers, foreign certified public accountants, foreign architects, foreign technicians etc. may be involved.
Therefore, the foreign enterprises shall take these reasons into consideration for their business arrangements and transactions otherwise the tax benefits will not be granted.
Why Brain Trust?
Brain Trust has multiple professionals with legal and taxation expertise. With our services, the foreign enterprises can efficiently obtain the tax benefits under Article 25 in Taiwan. First, Brain Trust can conduct a prior review on the related contracts to ensure such trade is qualified for the tax benefits application. If necessary, Brain Trust may also advise clients for amending the contracts to meet the requirement of Article 25. Secondly, when filing the application form, Brain Trust can assist our clients to submit the contracts in Chinese as required by the Taiwanese Tax Bureau. Third, during the process of application, Brain Trust can submit supportive or supplemental documents if requested by the Taiwanese Tax Bureau on behalf of clients. Finally, when the tax benefits approved need to be modified or extended, Brain Trust can also provide the subsequent application services.
AUTHOR: Hung Ou Yang
Managing Partner
Taipei
+886-2-2707-9976
[email protected]
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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