Frequently Considered Solutions
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 next section purposes to outline the three most frequently considered solutions and consists of five parts:
- Income Tax Act 25 (“ITA 25”)
- Tax treaties
- Tax exemption for royalties
Related-party transaction
But if the payer and payee are related in other ways, additional to the transaction itself, the pricing and necessity will be assessed carefully. For example, a Taiwanese subsidiary company’s taxable income may be minimized by paying technical service fees to its foreign parent company.
Deadline
The application should be submitted within 5 years after the payment takes place.
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.
Comparison
If a case satisfies more than one of the requirements of for the above strategies, the following additional issues are often taken into consideration. Usually the ITA 25 is most frequently adopted considering its low cost and low uncertainty:
| ITA 25 | Tax Treaties | Exemption for royalties | |
|---|---|---|---|
| Benefit | Reduced 3% withholding rate | Reduced treaty rate or exempted | Exempted |
| Required time, cost, and effort | Low | High | High |
| Uncertainty | Low | High | High |
| Time to apply | 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. |