Introduction to Taiwan Profit-Seeking Enterprise Income Tax

1. Overview

Taiwan tax authorities tax all profit-seeking enterprises operating in Taiwan. Domestic entities are taxed on a worldwide basis while other entities pay tax only on income sourced in Taiwan. Where a non-resident company has Taiwan sourced income but no place of business or agent in Taiwan, the company’s income is taxed at source under the withholding tax regime.

2. Tax Rate

Company tax rates are as follows:

(1) 17% on the total taxable profit but the tax may not exceed 50% of the excess of taxable profit over NT$120,000.

3. Tax on Interest

Interest received by a profit seeking enterprise is taxable as non-operating income. A creditable withholding tax is imposed as
follows:
(1) Domestic enterprises 10%
(2) Foreign enterprises 20%

For interest from the portion of the pecuniary amount realized by short-term commercial papers at their maturity in excess of the selling price at their initial issuance, 15% of the payment is withheld.

For interest distributed derived from beneficiary securities or asset-backed securities issued in accordance with the Financial Asset Securitization Act or the Real Estate Securitization Act, 15% of the distribution is withheld.

For interest on government bonds, corporate bonds or financial bonds, 15% of the payment is withheld.

For interest derived from repo (RP/RS) trade whereby a taxpayer purchases securities or short-term commercial papers as described above which shall be the net amount of the sale price at their maturity in excess of the original purchase price, 15% of the payment is withheld.

4. Tax on Retained Earnings

Tax Imputation System
Effective January 1, 1998, individual resident shareholders receiving dividends from a Taiwan company are entitled to imputed credit for the income tax paid by the company. For corporate shareholders, the dividends received are not considered taxable income; however, the tax credits shall be included in the balance of its shareholder-imputed credit account (ICA) and will be imputed to the shareholders for future dividend distributions. Imputed tax credit does not apply to non-resident shareholders.

Retained Profits Since 1998
Retained profits since 1998 attract an additional 10% income tax. Starting 1998, profits that are earned in a year but not distributed by December 31 of the following year are subject to 10% advance tax, which can be claimed as credit against the final tax liability of both resident and non-resident shareholders.

5. Branch Profits Tax

A foreign companyís branch or any other permanent establishment in Taiwan is subject to income tax only on its income from Taiwan source.

If the foreign enterprise has neither a branch nor a business agent in Taiwan, it is subject to withholding tax on its Taiwan source income.

6. Determination of Taxable Income

In arriving at taxable income certain expenses are allowed against total income. Expenses relating to the earning of business income are generally deductible to the extent that they are ordinary and necessary business expenses. The expenditure must be incurred in the course of operating a business or subsidiary. Certain foreign enterprises are permitted to calculate their taxable income as a percentage of their net income rather than claiming deductions for expenses. A foreign enterprise engaged in certain sector (eg. international transport, construction contracting, technical services, equipment leasing), regardless of whether it has a branch or a business agent in Taiwan, may apply to local tax authorities to consider a percentage of its gross business income as taxable. This percentage is 10% for an international transport business, 15% for all other businesses.

The following adjustments are required when calculating taxable income:

Depreciation and Depletion
The following methods are acceptable to the Tax Authorities: Straight line, declining balance, sum-of-years?digits and machine/working hour methods. In specified circumstances revaluation of fixed assets so as to increase claims for depreciation is allowable.

Property with a useful life of less than two years or a value of less than NT$80,000 are fully deductible in the year the purchase occurs. There is a depreciation limit of NT$1.5 million on passenger cars but NT$2.5 million on the passenger cars newly purchased since January 1, 2004.

Losses
The carry forward of losses is limited to ten years while loss carry back is prohibited. In the case of loss carry forwards these are only available to companies which keep a complete set of accounting records and which file blue returns or returns certified by a CPA.

Stock / Inventory
Inventory may be valued at cost or the lower of cost or market value. Generally however cost may be determined using actual cost FIFO, moving average, weighted average or other methods approved by the Tax Authorities. Uniformity between book and tax reporting is not required.

Dividends
A domestic company which owns shares in another domestic company is, regardless of the percentage of ownership, exempt from business income tax on the dividends from another domestic company. However imputation credits may not be used by companies and must be passed on to shareholders who are individuals.

A domestic company is taxable on dividends received from foreign companies although a unilateral foreign tax credit is generally available subject to the requirement of reciprocal treatment by that foreign country, and limited to the lesser of foreign tax paid or the tax which would otherwise have been payable in Taiwan.

Interest Deductions
Interest payable on loans necessary for business operations is deductible in the period it is actually incurred or paid provided certain procedural requirements are satisfied. Interest on borrowings from individuals or firms other than financial institutions over the standard rate prescribed by tax offices will be disallowed to the extent of the excess. Thin capitalisation rules became effective from year 2011.

Foreign Source Income
Foreign income of Taiwanese corporations is taxable in Taiwan with double taxation being avoided by way of foreign tax credits.

Taxes
All taxes with the exception of income tax and taxes related to capital acquisitions (eg taxes on the purchase of land) are deductible. However, the deduction is only available in the year they are paid or accrued. Fines or penalties under Taiwanese law are not deductible.

7. Incentives

Based on the Statute of Industrial Innovation, a company may credit up to 15% of the companyís total expenditure on R&D against its business income tax payable for that year; provided, that this credit shall not exceed 30% of the business income tax payable by the company in that year.

Based on the Biotech and New Pharmaceutical Development Act, biotech and new pharmaceutical companies are entitled to a deduction from their profit-seeking-enterprise income tax liability when undertaking R&D on new drugs and high-risk medical devices, as well as the training of personnel. The deduction is limited to 35% of the total amount invested in R&D and personnel training and may be credited against the profit-seeking-enterprise income tax within five years from the year the tax liability is incurred.

Besides, Investors who invest in Biotechnology and new Pharmaceutical companies and hold the shares for more than three years are entitled to a deduction from the profit-seeking-enterprise income tax payable for a period of five years starting from the year the tax liability is incurred, up to 20% of the acquisition cost of the shares.

The Statute for Private Participation in Infrastructure Projects provides tax incentives and government support for a private company investing in government-approved infrastructure projects. The tax incentives are:

• A company can enjoy a five-year tax exemption on business profits derived from government-approved infrastructure projects.
• Corporate shareholders holding registered stock issued by a private company in a government-approved infrastructure projects for at least four years can offset the shareholder investment tax credit against their profit-seeking-enterprise income tax liability. The tax credit is 20% of the cost of the shares.
• A private company investing in government-approved infrastructure or transportation construction project may credit 5% to 20% of qualified expenditure incurred against its profit-seeking-enterprise income tax liability starting from the year the expenditure is incurred.

Under the Offshore Banking Act 1983 domestic and foreign banks can conduct offshore banking business exempt from income tax, business tax, stamp duties, and withholding tax on interest.

8. Alternative Minimum Tax

The Income Basic Tax (IBT) Act is effective from 2006. If the amount of regular income tax for a profit-seeking enterprise or an individual is greater than or equal to the amount of basic tax, the income tax shall be calculated in accordance with the Income Tax Law. Whereas the amount of regular income tax is less than the amount of basic tax, the amount of income tax payable shall also include the balance of the amount of basic tax and regular income tax, in addition to the amount as calculated in accordance with the Income Tax Law. According to the Act, capital gain derived from marketable securities and futures and some income exempted from income tax by incentives (e.g. tax holidays for up to 5 years for investment in transport infrastructure, offshore banking business?) shall be included in the basic income of the profit-seeking enterprise and subject to IBT.

9. Related Party Transactions

Royalties, interest and service fees paid to foreign affiliates require adequate supporting transaction vouchers and documents to be deductible. Such payments are subject to withholding tax. Transactions between related parties will be subject to the Transfer Pricing Guidelines. The Transfer Pricing Guidelines have been announced and effective from the end of 2004. Contemporaneous documentation is required on annual basis effective January 1, 2005.

10. Withholding Taxes

Domestic corporations paying certain types of income are required to withhold as follows:

NOTES:
The numbers in the brackets refer to the notes below:
(1) For the interest on short-term marketable securities, the final withholding tax rate is 10%.
(2) Withholding in accordance with withholding schedule or a flat rate of 6%.
(3) The regular rate is 20%, but 15% will be used for:

• Interest from the portion of the pecuniary amount realized by short-term commercial papers at their maturity in excess of the selling price at their initial issuance.
• Interest distributed derived from beneficiary securities or asset-backed securities issued in accordance with the Financial Asset Securitization Act or the Real Estate Securitization Act.
• Interest on government bonds, corporate bonds or financial bonds.
• Interest derived from repo (RP/RS) trade whereby a taxpayer purchases securities or short-term commercial papers as described above which shall be the net amount of the sale price at their maturity in excess of the original purchase price.

11. Tax Treaties and Withholding Tax Rates

The following withholding tax rates (in percent) are applicable to Taiwanese-source dividends, interest and royalties paid to non-residents where the income is not connected with a permanent establishment in Taiwan:

NOTES:
(1) The treaty limits the aggregate of the corporate income tax and the tax on dividends to 40% of that part of the taxable income out of which the dividends are declared.
(2) The treaty is silent so the domestic rate applies.