To avoid double taxation and prevent tax evasion, Taiwan has signed tax treaties with multiple countries. If a profitable enterprise from a contracting country has business profits in Taiwan and is eligible for income tax reduction or exemption according to the tax treaty, it could prepare relevant documents and apply to the tax authority under the jurisdiction of the payer for approval of the reduction or exemption of income tax. For profitable enterprises from countries without tax treaties, if they receive similar service fees, the payer should withhold tax at the applicable rate of 20%.
Effective date and Applicable date
When a foreign profitable enterprise applies for tax treaty exemption on business profits, it should note that the effective date of the tax treaty is not necessarily the same as the commencement date of its application.
For example, the foreign profitable enterprise A Company (a resident of Korea). In September 2023, A Company dispatched personnel to Taiwan to provide technical services to Taiwan Company B for a period of two weeks. A Company appointed Taiwan Company B as its agent for the income from these services and applied for the tax exemption benefit under Taiwan-Korea Tax Treaty regarding business profits, and requested a refund of the withholding tax already paid on this income. However, based on the timing of the services provided by Korea Company A, although the Taiwan-Korea Tax Treaty had been signed and come into effect, the income in question belonged to the income payable for the fiscal year 2023, not income payable after January 1, 2024. Even if Korea Company A received payments from Taiwan Company B in the fiscal year 2024, the Taiwan-Korea Tax Treaty would not apply.
Permanent Establishment
The application for tax exemption on business profits under the tax treaty, it should be determined first whether the foreign company has a permanent establishment in Taiwan (such as whether individuals have been dispatched to Taiwan for more than 183 days). If a foreign company does not have a Permanent Establishment in Taiwan, it may qualify for the tax treaty benefit application.
Application Process
Whether the tax treaty is applicable
| Whether the tax treaty is applicable | * Has a tax treaty been signed? * Is the treaty in effect and applicable? * Does it meet the definition of residency? |
| How to apply | * Fill out the application form * Attach relevant documents * Explain the service process and provide evidence of services rendered. |
| Tax authorities’ focuses | * Verification of transaction facts * Audit to determine if a Permanent Establishment is formed |
| Profitable entities meeting the criteria can be exempt from taxation | * The tax bureau issues an approval letter * Taxes already withheld during the approved period can be applied for a refund |
Applications for tax treaty exemption on business profits can be submitted before payment is made, as long as evidence of the primary service activities stipulated in the contract is available for review.
Application document
- The original application form
- A Certificate of Residence (Resident Certificate) issued by the tax authority of the other Contracting Party. The certificate does not need to be verified by the local country’s legal notary public or overseas mission.
- The original power of attorney. Foreign profitable enterprises can apply by themselves or entrust companies in Taiwan or individuals to apply on their behalf. If applying through a representative, an authorization letter should be provided.
- A photocopy of the contract (with a Mandarin transcript)
- Income-related documents
- Explanation of service process
- Evidence supporting the service rendered.
- Statement regarding the presence of a fixed place of business and business agent in Taiwan
- Additional supplementary matters. Applicants can provide additional supplementary information at the time of application if needed.
What can PREMIA TNC Help you?
For foreign companies operating in Taiwan, it’s essential to seek professional guidance to ensure adherence to local tax laws and to leverage any available tax incentives or treaty advantages. Given the potential changes in tax regulations, staying informed and seeking current advice is paramount.
PREMIA TNC provides a comprehensive suite of tax services, including complimentary tax consultations and assistance in accessing tax benefits through the National Tax Bureau. Our team of expert consultants manages every step of the process, ensuring efficiency and a seamless application experience. We handle all interactions with the National Tax Bureau, meticulously review supplementary documents before submission, and prioritize addressing your queries. Feel free to reach out to us – we are here to offer assistance and guidance. Contact us today!
Conclusion
In recent years, many foreign companies have obtained income in Taiwan that is exempt from taxation or subject to a limited tax rate as stipulated by tax treaties. However, due to not actively applying for the use of tax treaties, the withholding tax on the income is directly deducted by the paying companies and the excess withholding tax is reported to their home country for offsetting against local income tax. However, some foreign tax authorities have refused to offset income tax on the grounds of not actively applying for the application of income tax treaties to the other contracting country.
The multinational groups should carefully examine whether there is income within the group that qualifies for tax exemption or has a limited tax rate in Taiwan under the provisions of tax treaties, and should apply to the Taiwan tax authorities for the relevant tax treaty provisions to reduce taxes. This not only reduces the burden on enterprises but also avoids the problem of double taxation.
FAQs
What is the purpose of tax treaties signed by Taiwan with other countries?
Tax treaties aim to prevent double taxation and evade tax evasion by providing guidelines for the taxation of income earned across borders..
How can a profitable enterprise benefit from a tax treaty when conducting business in Taiwan?
If eligible under the tax treaty provisions, a profitable enterprise from a contracting country can apply for income tax reduction or exemption in Taiwan.
What documents are required for applying for tax treaty benefits?
Essential documents include the application form, Certificate of Residence issued by the foreign country's tax authority, power of attorney, contract copy, income-related documents, and supplementary evidence
