HomeReduced Withholding Tax

Reduced Withholding Tax

Preface

When a foreign company or individual receives “Taiwan-sourced income” from a Taiwanese company, there is withholding tax on such income. The withholding rate varies by the type of income and ranges from 15% to 21%. On the other hand, there are certain tax strategies to mitigate the tax liabilities, and this article purposes to outline the three most frequently considered solutions and consists of five parts:

  • I. International withholding tax
  • II. Income Tax Act 25 (“ITA 25”)
  • III. Tax treaties
  • IV. Tax exemption for royalties
  • V. More considerations

International withholding tax

A withholding tax, or retention tax, is an income tax to be paid to the government by the payer rather than by the recipient of the income. The tax is thus withheld, or deducted, from the income paid to the recipient. And international withholding tax is the tax that Taiwanese government requires Taiwanese payers to withhold at specific rates from interest, dividends, royalties, technical consulting service fees, and other “Taiwan-sourced income” paid to non-residents; the rates vary by type of income.

Regular Rates
TypeWithholding Rate
Dividend21%
Interest20%
Interest of government bond15%
Royalties20%
Technical consulting service fee20%
Other Taiwan-sourced income20%
Time limit

The Taiwanese government requires withheld taxes to be paid and reported to tax authorities within 10 days after the income is released.

ITA 25

According to the Act, a foreign company engaged in international transport involving Taiwan, in construction contracting, providing technical services, or leasing machinery / equipment and the costs / expenses are difficult to calculate, regardless whether or not it has a branch office or business agent in Taiwan, may apply for approval to consider 10% or 15% of its total business revenue as its income derived within Taiwan. And the resulting gross withholding rate will become 2% or 3% (=assessed profit rate at 10% or 15% * regular withholding rate at 20%).

Reduced Rates

ActivitiesDeemed Profit Rate (a)Tax Rate (b)Withholding Rate (c=a*b)
International transport involving Taiwan
10%
20%
2%
Construction contracting
15%
20%
3%
Providing technical services
15%
20%
3%
Leasing machinery / equipment
15%
20%
3%

Requirements

To apply for the reduced 3% withholding rate,

Condition
Requirements
OrganizationBusiness entity or NPO. Practitioners of professions, such as law firms, are excluded.
NationalityApplicants from mainland China are excluded, and applicants from tax havens will be assessed carefully.
Permanent EstablishmentNot relevant and regardless whether or not it has a branch office or business agent in Taiwan.
Business in TaiwanOnly international transport, construction contracting, providing technical services, or leasing machinery / equipment are included.
RoyaltiesIf the payments for technical consulting services include royalties, the payments for royalties should be separated and excluded from the total technical consulting fee.
IndustryNo limitation.
Technical DepthNo limitation.
EffectsNo limitation.
Related-party TransactionIf the payer and payee are related in other ways, additional to the transaction itself, the pricing and necessity will be assessed carefully.
Cost CalculationHaving difficulty in calculating the project’s cost and profit according to the work done. In this circumstance, the taxpayer applies for the assessed profit rate at 10% or 15%, if the cost can be measured precisely, the taxpayer should be taxed according to the real profits based on real costs.
DeadlineThe application should be submitted within 5 years after the payment takes place.

Procedures

The case will be submitted to the National Taxation Bureau of the area, and it generally takes 2-4 weeks to address the issues.

Assessment

Usually only the contract will be assessed, and the evidence of service provision is not required.

Tax treaties

Currently, Taiwan has an “Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income” with 32 countries. Taxpaying residents of Taiwan’s treaty-partner countries should not be taxed by both tax jurisdictions and may apply for approval to reduce the withholding tax on their Taiwan-based dividends, interest, royalties, capital gains, business profits, entertainers / athletes, etc.

Reduced Rates

Treaty PartnerEffective YearDividendsInterestRoyaltiesBusiness Profits
Australia199610%, 15%10%12.5%Exempt
Austria201410%10%10%Exempt
Belgium200510%10%10%Exempt
Canada201513%, 15%10%10%Exempt
Denmark200510%10%10%Exempt
France201110%10%10%Exempt
Gambia199810%10%10%Exempt
Germany201210%, 15%10%, 15%10%Exempt
Hungary201010%10%10%Exempt
India201112.5%10%10%Exempt
Indonesia199610%10%10%Exempt
Israel200910%7%, 10%10%Exempt
Italy201510%10%10%Exempt
Japan201510%10%10%Exempt
Kiribati201410%10%10%Exempt
Luxembourg201410%, 15%10%, 15%10%Exempt
Malaysia199912.5%10%10%Exempt
North Macedonia199910%10%10%Exempt
New Zealand199715%10%10%Exempt
Netherlands200110%10%10%Exempt
Paraguay20105%10%10%Exempt
Poland201510%10%3%, 10%Exempt
Senegal200410%15%12.5%Exempt
Singapore198240%Not Available15%Exempt
Slovakia201110%10%5%, 10%Exempt
South Africa19965%, 15%10%10%Exempt
Eswatini199910%10%10%Exempt
Sweden200410%10%10%Exempt
Switzerland201110%, 15%10%10%Exempt
Thailand20125%, 10%10%, 15%10%Exempt
UK200210%10%10%Exempt
Vietnam199815%10%15%Exempt

Requirements

To apply for the treaty rates,

Condition
Requirements
OrganizationNo limitation.
NationalityThe applicant must be a taxpaying resident in a country with treaty partnership respecting Taiwan.
Permanent EstablishmentIf a foreign company conducts business in Taiwan through a permanent establishment in Taiwan, the profits attributable to that establishment may be taxed by the Taiwan government.
Business in TaiwanBusiness profits, income from real estate, shipping and air transport, dividends, interest, royalties, capital gains, etc.
RoyaltiesIf business profits include royalties, the royalties should be separated and treated differently from the business profits.
IndustryNo limitation.
Technical DepthNo limitation.
EffectsNo limitation.
Related-party TransactionIf the payer and payee are related in any other way, additional to the transaction itself, the pricing and necessity will be assessed carefully.
Cost calculationNot limited.
DeadlineThe application should be submitted within 5 years after the payment takes place.

Procedures

The case will be submiited to the area’s Tax Bureau, and it generally takes 8-12 weeks to address the issues.

Assessment

Both the contract and the evidence of service provision will be required.

Exemption for royalties

In order to encourage Taiwanese manufacturers to adopt advanced manufacturing technologies, income tax on the royalties paid to a foreign company shall be exempted if the royalties are paid in order to introduce new production technology or products, to improve product quality, or to reduce production costs; the same is true for remunerations paid to foreign companies for technical services rendered in construction of factories for an important production enterprises.

Reduced Rates

The tax on the royalty would be exempted if approved.

Requirements

To apply for the tax incentive,

Condition
Requirements
OrganizationBusiness entity or NPO. Practitioners of professions, such as law firms, are excluded.
NationalityApplicants must originate from countries belonging to the World Trade Organization.
Technical Depth1. The technology is not available in Taiwan, or
2. The technology is available in Taiwan but not satisfying.
IndustryThe technology is to be applied in the following industries:
1. Precision machinery and automation intelligence
2. Automotive
3. High-value metal materials
4. Wind energy
5. Solar energy
6. Communication of next-generation communication and smart handheld devices
7. Smart electronic components
8. Displays 9. LED lighting
10. Smart living environments
11. Cloud computing
12. High-value petrochemicals
13. High-value textiles
14. Electro-optical chemicals
15. Healthy food
16. Biotechnology
17. Recycling
18. Water recycling
19. information services
20. design
Effects1. The patent introduces new production technology to be applied in manufacturing new products, or it promotes product quality or efficiency, or it reduces production costs.
2. The technical service is provided to an important Taiwanese manufacturing company, for the construction of a factory.
RoyaltiesTotal revenue from royalties is applicable, but income from the sale of the patent is excluded.
Related-party TransactionIf the payer and payee are related in any other way, additionally to the transaction itself, the pricing and necessity will be assessed carefully.
Cost calculationNo limitation.
DeadlineThe application should be submitted within 5 years after the payment takes place.

Procedures

There are two stages:

StageAuthorityPurposeTime
1. Technical ReviewIndustrial Development BureaEvaluate technical depth, applicable industries, and effects.2-4 weeks
2. Transaction ReviewTax BureauClarify transaction details.4-8 weeks

Assessment

Both the contract and the evidence of service provision will be required.

More considerations

If a case satisfies more than one of the requirements of for the above strategies, the following additional issues are often taken into consideration:

ITA 25Tax TreatiesExemption for royalties
BenefitReduced 3% withholding rateReduced withholding rate or exemptedExempted
Required time, cost, and effortLowHighHigh
UncertaintyLowHighHigh
Time to apply

-Option 1. Pay regular 20% withholding tax first and apply for a reduced rate later. After obtaining the approval for the reduced rate, then proceed to apply for tax refund.

-Option 2. Apply in advance for the reduced rate and pay by the reduced rate directly.
Both option 1 and 2 are available.Usually only option 1 is available because the application requires the evidence of service provision and cannot be submitted beforehand.Usually only option 1 is available because the application requires the evidence of service provision and cannot be submitted beforehand.