Possible ways to Taiwan reduced withholding tax rate treatment

Mazars Taiwan has recently successfully completed a few reduced withholding rate treatments for our Multinational Clients that received various payments from Taiwanese companies and we would like to take this opportunity to share some of the insights as to how we obtained the approval from the Taiwanese tax authorities.

In general, Taiwan charges a 20% withholding tax rate whenever Taiwan companies make payments for various services, usage of intangibles and/or rental of properties to foreign enterprises.  As foreign companies usually also incur expenses when providing services, for example, this 20% withholding tax on the gross receipts is considered high and sometimes may not be fully creditable in the MNCs home countries.  This article tries to summarize some of the possible ways to reduce it.

Business profit provision under double tax agreements (DTA)

Taiwan currently has 34 effective DTA with many countries and if a company from a treaty country earns business profits from Taiwan and the company does not have a permanent establishment in Taiwan, then with an application sent to Taiwan tax authorities and if approved, payments from Taiwan companies would not attract any withholding tax.  Meticulous review of the treaty and surrounding facts related to the transaction, especially the distinction between royalties and business profits should be reviewed before submitting the application. 

Article 25 of Taiwan Income Tax Act

This domestic provision essentially deems profits at 15% of the payments made by a Taiwan company and after applying 20% withholding tax, the effective tax rate is 3% (15% deemed profits * 20% withholding tax).  Many MNCs consider 3% acceptable.  Transactions that qualify for this Article 25 include technical assistance, rental property and construction projects.  MNCs need to watch out for turn key project implication and also consult with a tax advisor as to what constitutes technical assistance.  In practice, we have seen master chef teaching cooking technics qualifies for technical assistance but various administrative help does not.

Article 4-21 of Taiwan Income Tax Act

This article mainly deals with charges related to patent, trademark, or specific technical assistance that MNCs may charge to its Taiwan customers who are in eligible industries which include windfarm, renewable energy, LED and other high tech endeavors.  This article will eventually grant 0% withholding treatment and therefore requires two levels of application process.  This first one to usually send to the “Industrial Bureau” under Ministry of Economic Affairs and if approved the second will send to the tax authority.  The whole process tends to be time consuming and pertinent authorities ask many questions that require communication and evidencing documentation.  MNCs are advised to work closely with their advisors and their Taiwan counterparts  so as to achieve a favorable outcome.

Taiwan-sourced income ruling as amended on Dec. 16, 2021

This ruling was originally issued back in 2009, with the intention of clarifing a long since controversial topic, and only after a few years of real cases reviewed and approved pursuant to this ruling, zwe are now able to share some of the key factors that gave rise to a reduced rate treatment.  Our observations include certain management fees (i.e., the content of which consists of many administrative and headquarter type of expenses) charged to a Taiwan related party may be allowed for a certain percentage of deductible expenses and eventually only the net portion is subject to withholding tax.  For example, overseas headquarters may want to charge (or sometimes allocate) 100 to its Taiwan subsidiary and Taiwanese tax authorities may eventually agree to allow a negotiated 68% expenses; this is a deemed 32% profit and apply 20% withholding tax to arrive at an effective 6.4% (32% * 20%) tax rate on the original 100. This ruling also contains treatment on software and other type of payments, therefore MNCs are advised to raise their specifics to tax advisors to assess if this ruling may be applicable.

Final note here is this article does not detail all types of transactions but simply would like to draw MNCs attention that reducing the 20% withholding tax may be possible.  Also legal documentation and convincing evidence are equally important.