Tax Differences Between Setting Up a Branch and a Subsidiary in Taiwan
For a foreign entity that is seeking to do business in Taiwan, a branch and a subsidiary are two commonly utilized methods. From an accounting perspective, a branch is equivalent to an extension of the parent organization and maintains its accounts jointly with the parent. The parent company is fully liable for the branch’s liabilities and legal claims. In comparison, a subsidiary is a separate corporate entity set up by the holding company. It maintains a separate set of books and its liabilities and legal claims cannot be passed on to the parent. When a foreign corporation expands its business in Taiwan, it usually involves in trading of common products, warehouse registration, manufacturing for domestic sale or export sale, or further invest in other business entities in exchange for shares.
Which is the most tax-efficient business structure for a foreign company investing in Taiwan? First, Taiwan tax law imposes a 20% corporate income tax on a foreign corporation’s Taiwan subsidiary earnings, a 21% on the dividends from its after-tax earnings, and a 5% on its undistributed profits. Under the current Taiwan tax law, a foreign corporation is not subject to the 20% tax on dividends earned by its Taiwan subsidiary until the moment the dividends are distributed to the foreign parent company.
Foreign companies are subject to a 20% corporate income tax on its earnings from a Taiwan branch office, and a 0% on the dividends from its after-tax earnings. Because a branch office is an extension of the parent company, it does not pay tax to the Taiwan government on dividends from its after-tax earnings. However, dividends distributed to a foreign company’s Taiwan branch due to its investments in Taiwan, are regarded as directly distributed to the foreign parent company and are subject to a 20% dividend income tax. After we understand the above tax laws, it is easier to choose between a branch or a subsidiary while investing in Taiwan. Therefore, Kaizen recommends:
- A foreign company investing in Taiwan will get more benefits by setting up a subsidiary when the main purpose is to further invest in other Taiwanese companies.
- When the main purpose of the foreign company’s investment in Taiwan is manufacturing or importing and exporting, a branch office can enjoy more tax benefits.
- Apart from the two purposes above, if a foreign company also intends to make real estate investments, setting up a branch office is more favorable in terms of tax.
As discussed above, along with the benefit of investing overseas, to set up an offshore business structure can also meet the operational goal of reducing the tax burden.
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