By Hung Ou Yang and Paul Ma
For most legal professionals, Taiwan's tax laws are complex and challenging from the perspective of tax planning. This is not only because of their provisions being scattered across various statutes but also because of the need to reference numerous interpretations and guidelines by tax authorities, resulting in the difficulties and uncertainties in tax planning. However, we may still summarise several key considerations for tax planning in Taiwan, including common tax incentives, exemptions and constraints. In pursuit of tax fairness and in alignment with the global trend against tax evasion, Taiwan's tax laws are increasingly targeting aggressive tax planning strategies, such as allocating profits in tax havens. These are crucial factors to consider when engaging in tax planning in Taiwan.
Under Taiwan's Income Tax Act, any entity operating within the territory of Taiwan falls under the definition of a profit-seeking enterprise (PSE) and is subject to income tax. A PSE refers to an entity operated with the intention of making profits, possessing a business licence or premises, including sole proprietorships, partnerships, companies and other organisations. Most foreign investors in Taiwan typically establish subsidiaries or branches for their operations, both of which are considered PSEs and shall be subject to income tax.
For domestic enterprises, whether they are sole proprietorships, partnerships or companies, all are subject to income tax. Therefore, considerations for selecting organisational forms are more likely surrounding debt liabilities, shareholder relationships, etc.
For foreign enterprises operating in Taiwan, the choice between establishing a branch or subsidiary is crucial because the tax treatments of each are significantly different. If a foreign enterprise opts to establish a subsidiary in Taiwan, it incurs income tax liabilities. Additionally, when repatriating post-tax profits to the foreign parent company, a withholding tax rate of 21 per cent applies. If the subsidiary chooses not to distribute profits, a 5 per cent tax on undistributed surplus earnings is still applicable. However, in the case of a branch, because it is legally viewed as an extension of the foreign parent company, repatriating post-tax profits to the parent company does not incur withholding tax.
Taiwanese PSEs are subject to income tax on their income earned globally. The applicable tax rate for general Taiwanese PSEs is 20 per cent in the year of 2024. Foreign PSEs earning income with the source of Taiwan are also subject to income tax and, more specifically, withholding tax.
Certain types of income are exempt from taxation, such as income from the sale of land acquired before 2015, income from securities and futures transactions, etc. Of particular importance is that dividends or earnings distributed by one Taiwanese PSE to another Taiwanese PSE are also exempt from taxation. This is a significant tax consideration for those intending to establish a holding company in Taiwan to control stakes in other companies.
Taiwanese PSEs are subject to taxation on their worldwide income. However, if income earned from overseas has already been taxed in the source country, the taxpayer can deduct the taxes paid abroad by presenting local tax payment certificates (provided that the amount does not exceed the tax calculated on the overseas income according to Taiwanese tax rates).
Generally, profits earned by overseas subsidiaries are taxed when repatriated to the Taiwanese parent company. However, if a Taiwanese PSE holds shares in affiliated companies in low-tax jurisdictions, such overseas affiliated companies might be classified as controlled foreign corporations (CFCs), and their earnings will be included in the Taiwanese PSE's income and subject to taxation.
In Taiwan, there are several significant tax exemptions, including income from securities and futures transaction. Particularly, dividends or earnings distributed by one Taiwanese PSE to another Taiwanese PSE are exempt from taxation.
Before 2015, income from land transactions was exempt from tax. However, because of recent legislative changes, gains from selling lands acquired after 2016 are now taxable income. Therefore, to simplify, income from the sale of land acquired before 2015 remains tax-free.
Taiwanese tax laws also provide tax incentives aimed at promoting industrial innovation. For example, companies can apply to deduct 15 per cent of their expenditure on research and development from their annual income tax liability or 10 per cent of such expenditure from their income tax liability for three years starting from the year of investment. Other areas such as investment in new smart machinery, investment in the adoption of fifth-generation mobile communication systems, and expenditures on forward-looking innovative research and development also qualify for tax incentives.
There are also tax incentives for income derived from intellectual property. Within certain limits, enterprises can deduct income from the assignment or licensing of intellectual property from taxable income.
The thin capitalisation rule under the Taiwanese Income Tax Act stipulates that PSEs with a debt-to-equity ratio exceeding 3:1 to related parties, whether directly or indirectly, cannot deduct the interest expenses on the excess portion as expenses or losses. Currently, Taiwan's thin capitalisation rules only restrict interest expenses to related parties and do not include interest payments to any third parties.
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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