Under existing tax regulations, foreign companies without a fixed place of business in Taiwan are liable to face a withholding tax rate of up to 20% on income derived from services rendered in Taiwan. However, foreign companies, including cross-border electronic services businesses, obtaining service income or business profit from Taiwan sources may apply to tax authorities for the approval of the applicable net profit rate and domestic profit contribution ratio. This is used to calculate the taxable income and the corresponding withholding tax.
The Crucial Role of Section 15.1 in Article 8th of the Taiwan Income Tax Act
This regulation stipulates that foreign companies without a fixed place of business or business agent in Taiwan, if obtaining service income or business profits as defined by the Income Tax Act within Taiwan, may, before receiving income, submit relevant supporting documents to the tax authorities to apply for the approval of the applicable net profit rate. This includes assessing the contribution of the entire transaction process within Taiwan to the total profit, for the purpose of calculating the taxable income in Taiwan.
Application Process
Foreign companies can choose to apply on their own or authorize individuals or businesses with fixed places of business within Taiwan to act as agents for the application.
Determination for Net Profit Rate
Foreign companies, if able to provide books and documents for verification, can have the net profit rate determined by verifying the deduction of relevant cost expenses based on the confirmed income from sources within Taiwan.
In cases where the above condition is not met, but the company can provide contracts identical to those signed with a Taiwan company and has, within the past three years, had the tax authorities determine the net profit rate by verifying the deduction of relevant cost expenses based on their books and documents, the net profit rate is determined based on the average of the net profit rates determined in each such instance.
If the above two conditions are not met, but the company can provide contracts, explanations of the main business items, details of transaction processes, and sufficient supporting documents for the tax authorities to determine the main business items, the net profit rate is determined based on the standard net profit rate applicable to the relevant main business item.
If the tax authorities find that the actual net profit rate is higher than the net profit rate determined according to the above two conditions, the determination is based on the information found.
Determination for Domestic Profit Contribution
If there are clear documents that explicitly delineate the degree of profit contribution within and outside Taiwan (such as auditor-verified reports, transfer pricing documentation, work plan records, or reports), the determination is verified based on these documents.
If the above condition is not met, but the company can provide contracts identical to those signed with a Taiwan company and has, within the past three years, had the tax authorities verify the degree of profit contribution within Taiwan based on documents delineating such contribution, the determination is based on the average of the degrees of profit contribution within Taiwan determined in each such instance. However, if the tax authorities find that the actual degree of domestic profit contribution is higher, the determination is based on the information found.
If the above two conditions are not met, the determination is made based on one hundred percent.
The Income Tax Assessment After Obtaining Approval
Calculation of taxable income = Total income × Approved net profit ratio × Approved domestic profit contribution ratio.
Example
Assuming a foreign company earns NTD$1,000,000 from services provided in Taiwan and has obtained approval under Section 15.1 in Article 8 of the Taiwan Income Tax Act, with the following parameters:
Approved net profit ratio = 30%
Approved domestic profit contribution ratio = 100%
The calculation for the approved withholding tax would be as follows:
Approved Withholding Tax = Total Income × Approved Net Profit Ratio × Approved Domestic Profit Contribution Ratio × Withholding Tax Rate
Approved withholding tax = NTD$1,000,000 x 30% x 100% x 20% = NTD$60,000
What can PREMIA TNC Help you?
It’s crucial for foreign companies operating in Taiwan to seek professional advice to ensure compliance with local tax laws and to take advantage of any available tax incentives or treaty benefits. Tax regulations may change, so staying informed and seeking up-to-date guidance is essential.
PREMIA TNC offers a complete range of tax services, including complimentary tax consultation and assistance in applying for tax benefits with the National Tax Bureau. Our team of professional consultants oversees each stage of the process, ensuring efficiency and a smooth application experience for you. We handle all communication with the National Tax Bureau, thoroughly review supplementary documents before submission, and prioritize addressing your inquiries. Don’t hesitate to reach out to us – we’re here to provide answers and support. Contact us today!
Conclusion
With regard to foreign companies obtaining service income or business profits in Taiwan, in the past, in order to seek rationalization of the tax burden, foreign companies can only submit the application to the tax authorities to verify and confirm the corresponding deduction of income-related costs and expenses. It is for the purpose of rectifying withholding and claiming tax refunds.
However, the process of how to substantiate and determine foreign costs and expenses is not very clear in tax enforcement practices. Moreover, when dealing with foreign companies and Taiwan companies that are not related parties, there are difficulties and inconveniences in obtaining relevant cost and expense information. This often results in prolonged and time-consuming application processes and a lack of clarity in advance tax burden assessments.
Now, the foreign companies, in addition to the option of verifying and confirming costs, can also apply to the tax authorities for the determination of the applicable net profit rate based on the standard net profit rate applicable to the main business items. This is undoubtedly another tax-saving measure, apart from payments for cross-border service fees under tax agreements and Article 25th of the Income Tax Act.
FAQ
Q1: What is the withholding tax rate for foreign companies without a fixed place of business in Taiwan?
A1: Foreign companies without a fixed place of business in Taiwan are subject to a withholding tax rate of up to 20% on income earned from services provided in Taiwan.
Q2: How can foreign companies apply for Section 15.1 in Article 8th of the Taiwan Income Tax Act?
A2: Foreign companies can choose to apply independently or authorize individuals or businesses with fixed places of business within Taiwan to act as agents for the application.
Q3: How is the income tax assessed after obtaining approval of Section 15.1 in Article 8th of the Taiwan Income Tax Act?
A3: Approved Withholding Tax = Total Income × Approved Net Profit Ratio × Approved Domestic Profit Contribution Ratio × 20% Withholding Tax Rate
