Corporate tax in Taiwan

Summary

Corporate Income Tax Rate (%) 17 (a)
Capital Gains Tax Rate (%) 17 (a) (b)
Branch Tax Rate (%) 17 (a)
Withholding Tax (%)
Dividends
Paid to Residents 0
Paid to Nonresident Corporations and Individuals 20 (c)
Interest
Paid to Resident Corporations 10 (d)
Paid to Resident Invividuals 10 (e)
Paid to Nonresident Corporations and Individuals 15 / 20 (f)
Royalties
Paid to Resident Corporations and Individuals 10 (g)
Paid to Nonresident Corporations and Individuals 20
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 10

a) For details, see Section B.

b) Effective from 1 January 1990, income from securities transactions is not subject to regular corporate income tax. Such income is subject to alternative minimum tax. See Section B.

c) For details and the definition of a nonresident corporation, see Section B.

d) Payments in connection with securities issued under the Financial Asset Securitization Act or Real Estate Securitization Act and interest derived from short-term commercial paper are subject to a 10% withholding tax. In addi­tion, they are included in the computation of the resident corporation’s tax­able income and are taxed at a rate of 17%.

e) Interest arising from short-term commercial paper, asset-backed securities, bonds, structured products and repurchase agreements underlying such financial instruments is not included in the tax computation in a resident individual’s tax return but is subject to a 10% withholding tax.

f) The applicable tax rate for interest arising from short-term commercial paper, asset-backed securities, bonds, structured products and interest arising from repurchase agreements is 15%. Other types of interest are subject to a tax rate of 20%.

g) The withholding of tax is not required if the licensor issues a Government Uniform Invoice (GUI).

Taxes on corporate income and gains

Corporate income tax. A domestic profit-seeking enterprise is sub­ject to corporate income tax on all of its income regardless of source. All profit-seeking enterprises, including subsidiaries of foreign companies that are incorporated under the Company Law of Taiwan, are considered domestic profit-seeking enterprises. A foreign profit-seeking enterprise is subject to tax only on income sourced in Taiwan.

Place of effective management. Taiwan does not currently have a place of effective management (PEM) measure. However, the Taiwan government is considering the introduction of a PEM regime. Under a draft bill currently under review by the Legisla­tive Yuan, a company would be regarded as tax resident in Taiwan if it is effectively managed in Taiwan. “Effective management” refers to the situation in which the company’s critical decisions are made in Taiwan or accounting and legal records are kept in Taiwan.

Tax rates. The taxing threshold for taxable income is TWD120,000, and the total net income exceeding TWD120,000 is subject to corporate income tax at a rate of 17%. However, the income tax payable may not exceed one-half of the taxable income minus the TWD120,000 threshold amount.

Alternative minimum tax. The alternative minimum tax (AMT) applies to domestic profit-seeking enterprises and foreign profit-seeking enterprises that have a fixed place of business or busi­ness agent in Taiwan, if the enterprise’s base income exceeds TWD500,000. The AMT is calculated in accordance with the following formula:

AMT = (basic income – deduction of TWD500,000) × 12%

Basic income equals the sum of the following items:

  • Taxable income
  • Tax-exempt income under the Statute for Upgrading Industries and other tax-incentive regulations
  • Income from transactions in securities and futures
  • Tax-exempt income of offshore banking units

If the regular income tax equals or exceeds the AMT, only the regular income tax is payable. The regular income tax equals tax payable calculated under the Income Tax Law, less tax credits. If the regular income tax is less than the AMT, the difference be – tween regular income tax and the AMT is payable in addition to the regular income tax. The additional tax payment cannot be offset by tax credits.

Tax incentives. A new Statute for Industry Innovation (SII) was announced and published on 12 May 2010 to replace the old Statute for Upgrading Industries (SUI), which expired on 31 De­cember 2009. In comparison to the SUI, the SII retains only the tax incentive for expenditure spent on research and development (R&D) activities and offers other non-tax subsidies for various qualified activities. Under the SII, enterprises may claim up to 15% of their R&D expenditures as a credit to offset against their corporate income tax payable in the current year only, with a maximum credit of 30% of the tax payable. The unused R&D tax credits obtained under the SII cannot be carried over to the future years. The SII is effective from 1 January 2010 through 31 Decem­ber 2019. The tax incentives obtained before the expiration of SUI remain effective after the expiration of SUI.

Capital gains. For profit-seeking enterprises, effective from 1 Jan­uary 1990, income from securities transactions is not subject to regular income tax. Such income is subject to AMT. A securities transaction tax of 0.3% or 0.1% is imposed based on the transac­tion value.

During the period of 1 January 2010 through 31 December 2016, trading in corporate bonds and financial bonds (as defined in the Banking Law of Taiwan) is exempt from securities transaction tax. The suspension of income tax on securities transactions applies only to securities issued and certified in accordance with the law of Taiwan. Gains derived from disposals of securities that are not issued or certified in accordance with Taiwan regulations are sub­ject to income tax.

Gains on sales of land are subject to land value increment tax (see Section D). Gains on sales of land had been exempt from income tax. However, effective from 1 January 2016, gains on sales of land that is acquired on or after 2 January 2014 and is held for a period of less than two years before disposal or that is acquired on or after 1 January 2016 is subject to income tax. Land value increment tax continues to apply but it can be credited against the income tax payable on gains on property.

Administration. The tax year is normally the calendar year. Per­mission must be obtained to use any other period. An annual tax return must be filed during the fifth month of the year following the tax year. An extension to file a tax return is not available.

In general, the late filing penalty is 10% of the tax due. It may not exceed TWD30,000 or be less than TWD1,500. A delinquent reporting surcharge is 20% of the tax assessed by the authorities. It may not exceed TWD90,000 or be less than TWD4,500. A taxpayer that fails to pay the tax within the prescribed time limit is subject to a surcharge for delinquent payment and interest on a daily basis at the prevailing interest rate provided by the Director­ate General of Postal Remittances and Savings Bank (PRSB). Underreporting of taxable income is subject to a penalty of up to two times the underpayment of tax. In the event of a failure to file the annual income tax return after expiration of the prescribed period, the tax authorities may make a provisional assessment of the amount of in come and tax payable on the basis of available tax data or the profit standard of the same trade. In the event that other tax information is subsequently obtained by the tax author­ities, the taxpayer is subject to a penalty of up to three times the tax shortfall, in addition to the delinquent reporting surcharge.

During the month of September, a profit-seeking enterprise (ex­cluding a sole proprietor, partnership, prescribed small-size en­terprise or tax-exempted entity) must pay an interim tax equal to 50% of the preceding year’s tax liability. Under the Income Tax Law, qualified enterprises may pay interim tax based on the in­come derived in the first six months of the current year. If the interim tax payment is made after 30 September but before 31 October, late payment interest accrues on a daily basis at the prevailing interest rate provided by the PRSB. If the interim pay­ment is not made by 31 October, the tax authorities assess one month’s interest at the prevailing interest rate provided by the PRSB.

Dividends. Effective from 1 January 2010, the dividend withhold­ing tax rate is 20% for nonresident corporations or nonresident individuals, regardless of whether the investments are approved by the Taiwan government pursuant to the Statute for Investment by Foreign Nationals or the Statute for Investment by Overseas Chinese. Withholding tax is not imposed on dividends paid to residents.

Under an imputation system, which took effect on 1 January 1998, a 10% surtax is imposed on the undistributed profits of companies in the second year following the year in which the profits are earned. This tax is in addition to the normal corporate income tax imposed on the profits. Resident individuals who receive divi­dends from resident companies must include the dividends in their taxable income and are granted tax credits for the corporate in­come tax and the 10% surtax paid by the distributing company in Taiwan. For nonresident individ uals and corporations, the tax credit is limited to 10% of the franked dividends (dividends paid out of company profits on which the 10% surtax has been im­posed). Cash refunds for excess credits are granted to shareholders who are resident individuals. However, for earnings distributed on or after 1 January 2015, foreign shareholders may credit only half of the surtax paid by the companies against the dividend withholding tax.

Companies must maintain an imputation credit account and cal­culate the imputation credits that are allocated to shareholders. These accounts are designed to limit the credit to the amount of corporate income tax and surtax paid in Taiwan. The total tax credit available is determined by multiplying the dividends receiv­ed by the ratio of total tax paid at the corporate level to accumu­lated retained earnings since 1998. Similar to the surtax credit, for dividends declared on or after 1 January 2015, resident share­holders can only claim half of the tax credit against their per­sonal income tax.

Dividends received by resident companies from other resident companies are exempt from corporate income tax. However, im­putation credits cannot be used by resident companies and must be passed on to individual shareholders. The tax credits are passed through to the company’s individual shareholders by adding the tax credits received to the numerator of the ratio described in the preceding paragraph.

Foreign tax relief. A tax credit is allowed for foreign income tax paid directly by a domestic profit-seeking enterprise, but it may

not exceed the additional amount of the Taiwan tax resulting from the inclusion of the foreign-source portion in the profit-seeking enterprise’s total income.

Determination of trading income

General. Income for tax purposes is computed according to Taiwan’s gen erally accepted accounting principles, adjusted for certain provisions included in the tax code.

Necessary and ordinary expenses of a profit-seeking enterprise are deductible, provided these are adequately supported by doc u-men tation. The guidelines of Examination of Income Tax of Profit-Seeking Enterprises, promulgated by the Ministry of Finance, pro vide guidance for determining deductible business expenses. Trans actions must conform to regular business practice; other­wise, tax authorities may assess tax based on standard profit mar­gins derived from industry statistics.

If the income of a company consists of both taxable income and exempt income, the costs, expenses or losses, except for those that are attributable to the taxable income and exempt income in a direct, reasonable and definite way, must be allocated to taxable income and exempt income based on certain permitted methods.

Tax exemptions. A foreign enterprise engaging in international transportation that derives income in Taiwan is exempt from tax if Taiwan and the home country of the foreign enterprise have entered into an international transportation income tax agreement, which provides reciprocal treatment to Taiwan international trans­portation enterprises operating in the foreign country.

Gains on sales of land had been exempt from income tax. How­ever, effective from 1 January 2016, gains on sales of land that is acquired on or after 2 January 2014 and is held for a period of less than two years before disposal or that is acquired on or after 1 January 2016 is subject to income tax. Land value increment tax (see Section D) continues to apply but it can be credited against the income tax payable on gains on property.

On approval from the competent authority, royalties paid to a foreign enterprise for the use of its patent rights or trademarks, or for the licensing of other special rights, may be exempt from tax if the licensed rights are used to introduce new production tech­nology or products, improve product quality or reduce production cost. In addition, service fees received by foreign enterprises for rendering technical services in the construction of a factory for certain strategically important enterprises (SIEs) and royalties for the licensing of patents to SIEs may also be exempt from tax on approval.

A foreign-based corporate taxpayer that is engaged in internation­al transportation, construction contracting, technical service pro­vision, or machinery and equipment leasing may apply to use a deemed-profit-rate method (15% in general, and 10% for interna­tional transportation business) in determining its taxable in come in Taiwan if it is difficult to calculate the costs and expenses arising from the conduct of the business in Taiwan.

Interest received by a foreign financial institution for offering financing facilities to its Taiwan branch offices or other financial institutions in Taiwan is exempt from tax. With the approval of the Ministry of Finance, interest received by a foreign financial insti­tution for extending loans to legal entities in Taiwan for financing important economic construction projects is also exempt from tax.

Inventories. Inventories are valued for tax purposes at the lower of cost or net realizable value. In determining the cost of goods sold, specific identification, first-in, first-out (FIFO), weighted average, moving average, or any other method prescribed by the competent authority may be used. How ever, the use of two differ­ent cost methods in one fiscal year is not allowed.

Provisions. Provisions for a retirement fund approved by the au – thorities are deductible in amounts up to 15% of the total payroll. The applicable percentage depends on whether the fund is man­aged separately from the business entity and whether it conforms to the provisions of the Labor Standards Law.

Allowance for bad debts is limited to 1% of the balance of out stand-ing trade accounts and notes receivable (secured or unsecured) at year-end.

Tax depreciation, depletion and amortization. A taxpayer may claim a depreciation deduction for most property (except land) used in a trade or business. Depreciation may be computed using the straight-line, fixed percentage on diminishing book value method, working-hour method, sum-of-the-years’-digits method or pro­duction-unit method. Under the working-hour method, deprecia­tion is computed based on the number of working hours that a depreciable asset is used in a tax year. The time periods over which an asset may be depreciated are specified by the tax authorities. The following are some of the applicable time periods.

Assets Years
Commercial buildings 10 to 50
Industrial buildings 5 to 35
Office equipment 3 to 5
Motor vehicles and vessels 3 to 18
Plant and machinery 2 to 20

Companies may use the accelerated depreciation method if they meet certain criteria.

Depletion of assets in the form of irreplaceable resources can be computed either based on the production units or methods pro­vided by the Table of Depletion Assets promulgated by the Min­istry of Finance. This method must be applied consistently from year to year. In addition, a taxpayer may claim an amortization de duction for intangibles and organizational expenses. Business rights (for example, commercial rights for operating public util­ity, telephone, public transportation, shipping and air transporta­tion businesses) and copyrights are amortized over 10 years and 15 years, respectively. Trademarks, patents and franchises must be amortized over the period prescribed by the respective laws governing the granting of these rights. Organizational and preop-erating expenditures incurred during the period from the plan­ning phase to the first year in which significant revenue is gen­erated from the main business activities must be expensed on occurrence.

Relief for losses. If certain requirements are met, companies may carry forward for up to 10 years losses that have been approved by the tax authorities and not yet expired. Loss carrybacks are not permitted.

Groups of companies. In general, associated or related companies in a group are taxed separately for corporate income tax pur poses and may not file consolidated tax returns. However, a financial holding company that holds 90% or more of the shares of subsid­iaries in Taiwan for at least 12 months may elect to file a consoli­dated profit-seeking enterprise income tax return under its own name.

In addition, a company that ac quires 90% or more of the shares or capital of its subsidiaries through a merger, spin-off or other ac quisition under the Business Merger and Acqui sition Law and holds such shares for at least 12 months may elect to file a con­solidated profit-seeking enterprise income tax return under its own name.

A 10% surtax on the undistributed consolidated retained earnings applies in addition to the corporate income tax on consolidated net income.

An election to file a consolidated profit-seeking enterprise return applies only to corporate income tax and, as a result, qualifying parent companies and their subsidiaries must calculate all other taxes separately.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, on sales and services 5
Business tax for financial industry 1 / 2 / 5
Land value increment tax, on unearned
increase in the value of land, payable by
the seller at the time of ownership transfer
20 to 40
Registration fee, on original or additional
capital contributions
0.025

Miscellaneous matters

Foreign-exchange controls. Under foreign-exchange control regu­lations, registered business entities or adults legally residing in Taiwan may remit out (in) unlimited funds for the import (export) of goods and services. However, prior declaration to the Central Bank of China (Taiwan) is required for the following:

  • An individual who has accumulated inward or outward remit­tances exceeding USD5 million in a year
  • A business entity with accumulated inward or outward remit­tances exceeding USD50 million in a year
  • A single remittance by an individual exceeding USD500,000
  • A single remittance by a business entity exceeding USD1 million

In addition, supporting documents, such as transaction contracts, must be submitted at the time of remittance for the Central Bank’s audit purposes.

Debt-to-equity rules. On 26 January 2011, the President of Taiwan announced the thin-capitalization rule enacted into Article 43-2 of the Income Tax Act. On 22 June 2011, the Ministry of Finance announced the enforcement rules for the thin-capitalization rule. The enforcement rules contain a debt-to-equity ratio of 3:1 (exclud ing companies in the financial industries). Interest on the excess portion of loans is not deductible. The enforcement rules do not apply to enterprises satisfying any of the following conditions:

  • Total net current annual operating income and non-operating income is less than TWD30 million.
  • Total annual interest expenses and total interest expenses derived from intercompany loans in the current year are both less than TWD4 million.
  • Before including the interest expenses in the taxable income calculation, the current year’s taxable income is negative and such tax losses are not eligible for the tax loss carryforward re­gime under Article 39 of the Income Tax Act.

Controlled foreign companies. Taiwan does not currently have a controlled foreign company (CFC) measure. Income derived by foreign subsidiaries of Taiwan companies is not subject to Taiwan income tax until it is repatriated to Taiwan in the form of divi­dends. However, the Taiwan government is considering the intro­duction of a CFC regime. Under the draft bill currently under review by the Legislative Yuan, a nonresident company is consid­ered a CFC if it is 50%-or-more directly or indirectly owned by a Taiwan resident company. A resident company that holds an inter­est of 50% or more in a CFC is taxed on the company’s share of the profits of the CFC, regardless of whether a dividend has been declared.

Anti-avoidance legislation. The Taiwan tax laws contain rules that deal with tax evasion and tax avoidance. The general rule is that the tax authorities may ignore transactions that constitute an abuse of the law and assess taxes with respect to each transacting party based on the economic substance of the transactions as well as on the attribution of the economic benefits. The same rule applies to sham transactions designed to conceal the economic reality of the transaction. In addition, under a draft bill currently under review by the Legislative Yuan, the Taiwan government is considering the introduction of rules of place of effective management into the anti-avoidance rules.

Transfer pricing. The Taiwan Transfer Pricing Examination Guide­lines (the TP Guidelines) took effect on 30 December 2004. Except for immaterial amounts from related-party transactions, extensive contemporaneous documentation is required. Under the TP Guide­lines, on filing the annual income tax return, a profit-seeking enterprise must have the transfer-pricing report and relevant documents prepared and ready for audit, if requested. In addition, in the event of a tax audit, a profit-seeking enterprise must pro­vide the tax authorities with all required documents within one month of a request for such documents. The TP Guide lines pro­vide that the tax authorities may impose a maximum penalty of 200% of the tax shortfall resulting from improper transfer prices.

Treaty withholding tax rates

Taiwan has entered into double tax treaties with the countries listed in the table below.

Taiwan has entered into international transportation income tax agreements with Canada, the European Union, Germany, Israel, Japan, Korea (South), Luxembourg, the Macau SAR, the Nether­lands, Nor way, Sweden, Thailand and the United States.

The following table lists the withholding tax rates under Taiwan’s double tax treaties. The rates apply only if the recipient is the beneficial owner of the income.

Dividends

%

Interest

%

Royalties

%

Australia 10/15 (a) 10 12.5
Belgium 10 10 10
China (o) 5/10 (p) 7 7
Denmark 10 10 10
France 10 10 10
Gambia 10 10 10
Germany 10 10/15 (h) 10
Hungary 10 10 10
India 12.5 10 10
Indonesia 10 10 10
Israel 10 7/10 (i) 10
Japan (o) 10 10 10
Kiribati 10 10 10
Luxembourg 10/15 (b) 10/15 (j) 10
Macedonia 10 10 10
Malaysia 12.5 10 10
Netherlands 10 10 10
New Zealand 15 10 10
Paraguay 5 10 10
Senegal 10 15 12.5
Singapore – (c) – (k) 15
Slovak Republic 10 10 5/10 (n)
South Africa 5/15 (d) 10 10
Swaziland 10 10 10
Sweden 10 10 10
Switzerland 10/15 (e) 10 10
Thailand 5/10 (f) 10/15 (l) 10
United Kingdom 10 10 10
Vietnam 15 10 15
Non-treaty countries 20 (g) 15/20 (m) 20

a) The 10% rate applies to dividends paid to a company (other than a partner­ship) holding directly at least 25% of the capital of the payer. The 15% rate applies in all other cases.

b) The 15% rate applies if the beneficial owner of the dividends is a collective-investment vehicle established in Luxembourg and treated as a body corpo­rate for tax purposes in Luxembourg. The 10% rate applies in all other cases.

c) For dividends paid to Singapore residents, the withholding tax on the divi­dends and the corporate income tax payable on the profits of the payer may not exceed 40% of the taxable income of the payer out of which the dividends are paid.

d) The 5% rate applies if the beneficial owner of the dividends holds directly at least 10% of the capital of the payer. The 15% rate applies in all other cases.

e) The 10% rate applies to dividends paid to a company (other than a partner­ship) holding directly at least 20% of the capital of the payer. The 15% rate applies to other dividends.

f) The 5% rate applies if the beneficial owner of the dividends holds at least 25% of the capital of the payer. The 10% applies in all other cases.

g) The 20% rate applies to dividends paid to nonresident corporations and non­resident individuals, effective from 1 January 2010 (see Section B).

h) The 15% rate applies to interest on real estate investment trusts and real estate asset trusts. The 10% rate applies in all other cases.

i) The 7% rate applies to interest on bank loans. The 10% rate applies in all other cases.

j) The 15% rate applies if the beneficial owner of the interest is a collective-investment vehicle established in Luxembourg and treated as a body corpo­rate for tax purposes in Luxembourg. The 10% rate applies in all other cases.

k) The Singapore treaty does not provide a preferential withholding tax rate for interest payments.

l) The 10% rate applies to interest received by financial institutions (including insurance companies). The 15% rate applies in all other cases.

m) The 15% rate applies to interest on financial instruments (see Section A).

n) The 5% rate applies to the royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment. The 10% rate applies in all other cases.

o) This treaty is not yet effective.

p) The 5% rate applies to dividends paid to a company (other than a partnership) holding directly at least 25% of the capital of the payer. The 10% rate applies in all other cases.