Taiwan Royalty Tax: Essential Information for Companies 

As Taiwan’s industries continue to innovate, there is a corresponding increase in technological competitiveness. To develop and enhance advanced process technology capabilities, Taiwanese businesses often collaborate with foreign enterprises to obtain or introduce patents and technology licenses owned by these foreign enterprises. Consequently, they need to pay substantial royalties or licensing fees. However, when foreign enterprises receive these royalties or licensing fees, they also encounter the situation where Taiwanese businesses withhold income tax at the time of payment. 

Tax treaties can reduce the withholding tax on royalties 

Taiwan has currently signed and enacted comprehensive income tax treaties with 35 countries. As long as Taiwanese businesses sign patent and technology licensing contracts with foreign enterprises from countries that have tax treaties with Taiwan, they can minimize withholding tax on royalties by utilizing the reduced tax rates outlined in these treaties. This can lower the standard withholding tax rate from 20% to 10%. For certain specific tax treaties, the tax rate on royalties for the use or right to use industrial, commercial, or scientific equipment can be reduced to 3%-5%. For example, under the Taiwan-Poland tax treaty, the total amount of royalties paid for the use of such equipment does not exceed 3%, and under the Taiwan-Czech tax treaty, the withholding tax rate for these royalty payments does not exceed 5%.

Many Taiwanese businesses have not taken full advantage of this tax relief tool. Furthermore, when applying reduced tax rates for royalties under tax treaties, Taiwanese businesses must specify the relevant treaty provisions and submit the following documents for tax authority review:

• A Resident Certificate issued by the tax authority of the other Contracting State confirms that each beneficiary listed is a resident of that Contracting State. 
• the licensing or technical service contracts 
• the process of calculating royalties or technical fees 

Application Process 

Determining Tax Treaty Applicability 

• Has a tax treaty been signed? 

• Is the treaty in effect and applicable? 

• Does it meet the definition of residency? 

Application Steps 

• Fill out the application form 

• Attach relevant documents 

• Provide a detailed explanation of the service process and evidence of services rendered 

Tax Authorities’ Review 

• Verify the transaction facts 

• Conduct an audit to determine if a Permanent Establishment is formed 

Tax Exemption for Eligible Entities 

• The tax bureau issues an approval letter 
• Apply for a refund of taxes withheld during the specified period. 

Application for Royalty Income Tax Exemption 

According to the principles for determining royalty tax exemption, Taiwanese enterprises that use patents, trademarks, and various proprietary rights owned by foreign enterprises due to the introduction of new production technologies or products, or to improve product quality and reduce production costs, may be exempt from income tax if specially approved by the government authorities. Applicants should pay special attention to the following before applying for royalty income tax exemption: 

1. Taiwanese enterprises must have substantive technology introduction or cooperation with foreign enterprises involving critical technologies that cannot be provided by Taiwan. Alternatively, if Taiwan can provide the technology, its performance must not meet the specifications required by the Taiwanese enterprise. 

2. If the introduced patent technology is still in the research and development phase and requires ongoing joint R&D with a foreign enterprise, without being ready for mass production, the joint development technology R&D expenses are not eligible for the tax exemption.

3. If the introduced patent technology is used for production by other offshore factories and not manufactured in Taiwan, it is not eligible for the tax exemption. 

4. The patent owner and the licensor should be the entities eligible for the royalty tax exemption. If the original owner authorizes the patent rights to another foreign enterprise, which then sublicenses it to a Taiwanese enterprise, the foreign enterprise (not being the patent owner) cannot apply for the tax exemption. 
   
5. If a foreign enterprise demands payment for infringement royalties due to a claim that the Taiwanese enterprise infringed their rights, the payments made as “compensation” or “settlement” are classified as other types of income, not royalties for the use of rights, and thus do not qualify for the royalty tax exemption.

Conclusion 

In summary, while tax treaties can only reduce the withholding tax rate on royalty payments, obtaining approval from relevant authorities based on royalty tax exemption principles can completely exempt the withholding tax on royalties, resulting in greater tax savings. However, the application process is intricate and time-consuming, and the tax exemption is only applicable to royalties related to patents, trademarks, computer software copyrights, and power plant construction technologies. It is recommended that Taiwanese profit-making enterprises carefully review technology licensing agreements with foreign enterprises and assess whether they can reasonably reduce the withholding tax on royalty payments from cross-border transactions through the maximum tax rates specified in tax treaties or royalty tax exemption principles. 

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