Corporate Taxation System in Taiwan Corporate Income Tax The amount of income of a profit-seeking enterprise shall be the net income, i.e., the gross yearly income after deduction of all costs, expenses, and losses. When calculating the amount of income in which there are taxable and exempt incomes involved, the costs, expenses or losses, except those which are attributable to such respective income in a direct, reasonable and definite way, which may be attributed to thereby and recognized as its deductions respectively, shall be reasonably allocated to the respective income. Measures regarding such allocation shall be prescribed by the Ministry of Finance ( MOF ). Corporate tax returns should be filed within 5 months after the fiscal year end. A semi-annual tax payment should also be made before the end of the ninth month after the fiscal year end. Corporate Income Tax Rate Taxable income Up to NT$50,000 NT$50,001 to NT$71,428 NT$71,429 to NT$100,000 NT$100,001 and over (Note 2) Tax Rate Exempt 50% of taxable income less NT$25,000 15% of taxable income 25% of taxable income less NT$10,000 Imputation Tax System The imputation tax system is designed to reduce overlapping tax payments by shareholders facing both corporate income tax at company level and individual income tax at individual level. Under this system, the resident individual shareholder is allowed to offset the corporate income tax paid against individual income tax liabilities. On the other hand, dividends paid to non-resident shareholders shall be subject to 20% withholding tax. The new system also allows the government to levy a 10% profit retention tax on undistributed earnings. Income Basic Tax, Otherwise Known as Alternative Minimum Tax ("AMT")
The MOF has announced the Income Basic Tax Act ( IBTA ) on January 1, 2006. The AMT is generally levied on high-income enterprise that pays disproportionately low corporate taxes, i.e. enterprises that enjoy tax holidays and tax exemptions. The basic income is calculated as the sum of the taxable income calculated in accordance with the Income Tax Act plus various categories of tax exempt income. The basic tax shall be the amount of basic income with a deduction of NT$2 million, multiplied by the applicable tax rate of 10%. Profit-seeking enterprises shall pay the higher of regular taxable income subject to 25% corporate income tax or basic income subject to 10% tax. The IBTA does not apply to foreign enterprises which do not have a fixed place of business or business agent in Taiwan. Loss Carryforwards Losses may be carried forward for 5 years if tax returns are certified by a CPA both in the years the losses occurred and in the years the losses were credited against taxable income, but can not be carried back. Capital Gains Gains on disposal of properties are taxable, with the exception of gain from sale of land, where land value incremental tax is levied instead. Capital gain on sale of securities is currently also tax exempt, and securities transaction tax is levied instead. Withholding Tax Generally, all Taiwan source income derived by a non-resident with no permanent establishment in Taiwan will be subject to withholding tax assessments in Taiwan at 20% standard rate. Withholding tax rates may be reduced under Double Taxation Agreements. Taiwan Tax Incentives Inward Investment
Companies that invest in emerging, important and strategic enterprises may claim 20% of the investment amount as a tax credit. An entity which qualifies as an emerging, important and strategic enterprise may elect the shareholder s investment credit described above, or a five year tax holiday for the enterprise itself. Capital Investment A company can claim as investment tax credits in the current year 5% to 20% of the expenditures described below: 1. Automated production equipment or technology; 2. Resource recycling, pollution control equipment or technology; 3. Equipment and technology used in energy saving, new and clean energy, and recycling of industrial wastewater; 4. Equipment and technology for reducing greenhouse gas emission and improving energy utilization efficiency; 5. Hardware, software, and technology used in internet, broadcasting capacity, enterprise resource planning, communication and telecommunication products, electronics, video conference equipment and digital content production that would promote the efficiency of corporate digital information. A company may credit a maximum of 35% of the amount of funds invested in personnel training and research & development against the amount of income tax payable for the current year and following four years provided certain criteria are fulfilled. Investment tax credits utilized for each year shall not exceed 50% of the corporate income tax payable. However, this limitation shall not apply to the investment tax credit to be utilized in the last year. Incentives for Establishing Operation Headquarters and Logistic and Distribution Centers Within Taiwan The Taiwan government promulgated certain tax incentives to encourage companies to set up operation headquarters or logistic and distribution centers in Taiwan. For operation headquarters, the following income obtained from foreign affiliates will be corporate tax exempt: managerial service or R&D income; (2) royalty income; (3) investment income and gain from disposal of investment. For logistic and distribution centers, income obtained from warehousing, simple processing of goods,
and delivery of goods to domestic customers shall be exempt from corporate income tax. Other Frequently Seen Taxes Value Added and Non Value-added Business Tax Transactions (including sale of goods or services) incurred within the territory of Taiwan and importation of goods are generally subject to a 5% business tax, unless provided otherwise. The taxpayer is generally classified as a value-added type entity ( VAT entity ), a non value-added type entity ( Non-VAT entity ) or a dual tax entity. As a general rule, most non-financial-institution business entities are VAT entities. The current VAT rate is 5%. Export sales and services are subject to 0% VAT. In general, VAT returns shall be filed bi-monthly and submitted to the tax authority within 15 days of the following odd month. Stamp Duty: According to the Stamp Tax Act, stamp tax shall be levied on the following documents drawn up in Taiwan: monetary receipts, movable property sales contract, contracting agreement, contracts for the sale, transfer, and partition of real estate. Securities Transaction Tax: Transactions of securities are subject to a security transaction tax of 0.3% of the gross price from the sale of stocks and 0.1% on the gross proceeds from sale of debenture and government bonds. Custom Duties: Custom duties are levied on the value of imported commodities. The customs duty rate will depend on the types of goods being imported. Transfer Pricing Issue
From year 2004 and onwards, taxpayers must include with their income tax return any details of related parties and relevant related party transactions if a certain threshold is exceeded. Also, beginning 2005, a transfer pricing report incorporating an industry and economic analysis, a functional and risk analysis, a description of the selected best pricing methods, selection of comparables, etc, shall be prepared if certain safe harbor rules are exceeded. Henceforth, any transfer or use of tangible property, intangible property, provision of services and financing arrangement within affiliates that constitute related party transactions will be subject to scrutiny by tax authorities and the MOF. List of Rates of Taiwan Withholding Tax of Dividends, Interest and Royalties under the Respective Tax Treaties Countries \ Income Items Dividends Interest Royalties Non-treaty Countries 20,25,30 20 20 Australia 10,15 10 12.5 Belgium 10 10 10 Denmark 10 10 10 Gambia 10 10 10 Indonesia 10 10 10 Macedonia 10 10 10 Malaysia 12.5 10 10 New Zealand 15 10 10 The Netherlands 10 10 10 Senegal 10 15 12.5 Singapore 40* N/A 15 South Africa 5,15 10 10 Sweden 10 10 10 Swaziland 10 10 10 UK 10 10 10
Vietnam 15 10 15 *The tax shall not exceed an amount which together with the corporate income tax payable on the profits of the company paying the dividends constitutes 40% of that part of the taxable income out of which the dividends are declared. Note: The Taiwan withholding tax rate on dividends, interest, and royalties payable to a non-resident is 20%, but the dividend-withholding rate is 30% for non-resident individuals and 25% for non-resident enterprises for investments not approved under the Statute for Investment by Overseas Chinese or the Statute for Investment by Foreign Nationals. Key contact information: Rosamund Fan Tax Director Tel: (+866) 2 2729 6666 Ext. 23702 Email: Rosamund.Fan@tw.pwc.com