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Income Tax in Taiwan



Taxes on personal income:

Individual income tax is levied on Taiwan-sourced income of both resident and non-resident individuals, unless exempt under the provisions of the Income Tax Act and other laws.

Personal income tax rates:

A non-resident alien residing in Taiwan for less than 90 days in a calendar year is subject to 18% withholding tax (WHT) on salary remuneration received from a Taiwan-registered entity. Remuneration received from an entity registered outside of Taiwan is tax exempted.

A non-resident alien residing in Taiwan for more than 90 days but less than 183 days in a calendar year is subject to tax at a flat rate of 18% on Taiwan taxable salary income, regardless of where the remuneration is paid.

A resident alien is subject to the following progressive tax rates for 2017 individual income tax return filing:

Taxable income (TWD)
Tax rate (%)
Less progressive difference (TWD)
Over
Not over
0
540,000
5
0
540,001
1,210,000
12
37,800
1,210,001
2,420,000
20
134,600
2,420,001
4,530,000
30
376,600
4,530,001
10,310,000
40
829,600
10,310,001
and above
45
1,345,100

Income basic tax (IBT):

In addition to regular income tax calculations under the Income Tax Act, Taiwan also imposes IBT, at a flat rate of 20%, on individuals who are tax residents in Taiwan (including expatriates who stay in Taiwan for 183 days or more in a tax year). Foreign-sourced income is included in the calculation of IBT if the following criteria are met:

·        The individual is a tax resident of Taiwan.
·        Foreign-sourced income is equal to or more than TWD 1 million with basic income exceeding TWD 6.7 million.

Under the IBT Act, a taxpayer must calculate the amount of IBT due on income subject to IBT after adding back certain items and compare the result with the regular income tax payable. If the IBT payable is greater than the regular income tax payable, the taxpayer has to calculate and pay IBT based on the following formula:

·        Income subject to IBT = Regular taxable income + add-back items
·        IBT = (Income subject to IBT - TWD 6.7 million) x 20%

The add-back items include qualified insurance benefits, income derived from transaction of beneficiary certificates of privately-placed securities investment trust funds, non-cash charitable donations, and foreign-sourced income totalling TWD 1 million or more.

Note that although the inclusion of foreign-sourced income increases the IBT burden, any foreign taxes paid on foreign-sourced income may be credited against IBT payable, with certain limitations.

Income determination

Employment income:

An alien is taxed on salaries, bonuses, and commissions earned for work performed in Taiwan, regardless of where payment is made. Fringe benefits provided to a foreign employee in the form of cash allowances via payroll are taxable regardless of the nature of the benefits. Fringe benefits provided directly by the employer without cash payment to the employee are also taxable unless the foreign employee qualifies for special tax incentives and specific arrangements are made.

However, there is one exception. If an assignee stays in Taiwan for 90 days or less in a calendar year, the assignee’s income received from an employer outside of the territory of Taiwan can be exempted from Taiwan income tax assessment.

Capital gains:

Taiwan does not impose a separate capital gains tax (CGT), as all gains, unless specifically exempted by law, or as otherwise regulated, are assessed as ordinary income and subject to regular income tax assessment. CGT on securities has been abolished effective from 1 January 2016. Please note that capital gains derived from sales of Taiwan-based securities prior to 1 January 2016 are still subject to CGT if certain conditions are met.

Residence:

An individual with a domicile in Taiwan and habitually residing in Taiwan is considered a resident unless one meets the 31-days rule mentioned below. A foreign individual who stays in Taiwan for 183 days or more in a calendar year is considered a resident. A foreign individual who resides in Taiwan for less than 183 days in a calendar year is considered a non-resident.

A Taiwan national with household registration in Taiwan may be deemed as a non-resident if one has resided in Taiwan for less than 31 days and more than one day within a calendar year and one’s centre of vital interest (i.e. entitlement to Taiwan social security benefits, individual’s spouse or dependent child resides in Taiwan, or performs other economic/financial activities in Taiwan) is not in Taiwan.

Tax administration

Taxable period:

The tax year is the same as the calendar year, which runs from 1 January through 31 December.

Tax returns:

Husbands and wives must file joint returns if both the husband and wife have resided in Taiwan for more than 183 days in a calendar year. There are three options available for filing a joint return:

· A joint return is filed by husband and wife incorporating all types of income to determine the taxes due.
· A spouse can calculate taxes due on that spouse’s salaries/wages separately, with additional taxes calculated on remaining joint income (including income derived by dependants claimed in the tax filing unit).
· A spouse can include other types of income earned by that spouse together with salaries/wages earned to calculate the taxes due, with additional taxes calculated on remaining joint income (including income derived by dependants claimed in the tax filing unit).

The third option is provided as an alternative so that married couples are not penalised for higher progressive tax rates due to filing of joint return and consolidation of all earnings.

Non-residents who are in Taiwan for less than 90 days in a calendar year are not required to file an income tax return as long as tax is withheld by the local employer on compensation paid in Taiwan.

Individual taxpayers should settle the tax balance due (if any) and file an annual individual income tax return with the Taiwan tax authority before 31 May of the following year, with no extensions available.

Payment of tax:

There is income tax withholding on locally paid salaries. Additional tax due must be paid at the time of filing before 31 May of the following year.

For late payment, interest will be imposed on the outstanding tax balance due on a daily basis from 1 June to the actual date of tax settlement.



Taxes on corporate income:

The corporate income tax (CIT) rate in Taiwan is 17%.

Resident companies in Taiwan are taxed on their worldwide income as follows:

Taxable income (TWD)
Tax thereon
Up to 120,000
Exempt
120,001 and over
17% of total taxable income

A non-resident company is taxed on income derived from Taiwan sources. A non-resident company with a fixed place of business (FPOB) or business agent in Taiwan is taxed similarly to a resident company (i.e. subject to filing of an annual CIT return based on the same CIT rate provided above). A non-resident company having no FPOB or business agent in Taiwan is subject to withholding tax (WHT) at source on its Taiwan-sourced income. WHT rates on dividends, interest, and royalties may be reduced if the recipient is a tax resident of a tax treaty country and the relevant treaty provides for a reduced rate.

Tonnage tax system:

A qualifying enterprise having its head office in Taiwan engaged in maritime transportation may elect to be taxed under the tonnage tax system, where a lump sum tax is calculated on the net tonnage of their fleet. Once the application is approved, the enterprise must remain under the tonnage tax system and cannot switch to the regular tax system at its discretion for ten consecutive years. Furthermore, loss carryforwards and tax incentives are not eligible under the tonnage tax system.

Profit retention tax:

An additional 10% profit retention tax is imposed on any current earnings of a corporation that remain undistributed by the end of the following year. Taiwan branches of foreign companies are not subject to profit retention tax.

Imputation tax system:

Taiwan operates an imputation tax system to eliminate double taxation on earnings of a corporation. The 17% CIT and 10% profit retention tax already paid by the corporation can be distributed to the resident individual shareholders as tax credits to offset against their individual income tax. However, the tax credits distributable to shareholders are subject to certain limitations. Currently, the imputation tax credit is reduced by one-half.

Non-resident shareholders may credit the 10% profit retention tax previously paid by the investee company against the dividend WHT where the dividends are distributed from retained earnings that have already been subject to the 10% profit retention tax. Please note that credit for profit retention tax from dividend WHT is calculated based on a prescribed formula and subject to a ceiling. The ceiling is one-half of the original amount. That is, the ceiling of 10% profit retention tax creditable against dividend WHT is computed as 'dividends distributed from retained earnings where 10% profit retention tax has already been levied' x 10% x 50%.

Income basic tax (IBT):

All Taiwan resident companies, as well as non-resident companies with an FPOB or business agent in Taiwan, should calculate IBT if they earn certain income that is tax-exempt. The basic income of a company is the amount calculated in accordance with a formulae stipulated by the government, with a deduction of TWD 500,000. The IBT rate is 12%. If the IBT amount is greater than the regular CIT amount, taxpayers must pay income tax based on the regular CIT amount plus the difference between the IBT amount and the regular CIT amount. On the other hand, if the regular CIT amount is greater than the IBT amount, no special action is required.

Income determination:

A Taiwan resident company is taxed on its net income, which is defined as gross annual income after deduction of costs, expenses, losses, and taxes. Except for certain exempt items, income from all sources, including offshore and onshore, is subject to CIT.

A non-resident company is only taxed on its Taiwan-sourced income. Article 8 of the Income Tax Act and the related Guideline defines the types of income that should be regarded as sourced from Taiwan. For example, fees received by a non-resident company for service performed entirely outside of Taiwan are exempt from income tax assessment, subject to supporting evidentiary documents.

Inventory valuation:

Inventory must be valued at cost. If cost exceeds the net realisable value, the latter may be used as the valuation basis. Cost may be determined by the first in first out (FIFO), moving average, weighted average, specific identification, or any other method approved by the tax authorities. Conformity between financial and tax reporting is not required.

Capital gains:

Gains on the disposal of fixed assets are taxable as current-year income of the company, with the exception of gains on the sales of land under the old real estate taxation regime. Capital gains on disposal of Taiwanese marketable securities and futures by resident companies and non-resident companies with an FPOB or business agent in Taiwan are exempt from CIT assessment, but are liable for IBT of 12%, with an exemption amount of TWD 500,000. Capital losses may be deducted against capital gains and carried forward for five years. 50% of capital gains can be tax exempt should the securities be held for more than three years. In addition, securities transaction tax is levied on the sales proceeds.



Dividend income:

Dividends received from resident investee companies by a resident corporate shareholder are not included in taxable income. In addition, the imputation tax credit derived from the dividend income of the investee corporation can be distributed to domestic corporate shareholders, but this tax credit cannot be used to offset the domestic corporation’s income tax liability; rather, the tax credits must be recorded in a separate book until they are further distributed to the resident individual shareholders of the domestic corporation.

Dividends received from foreign subsidiaries are taxable, but credits are given for the WHT paid offshore, limited to the incremental tax liability that would result if the dividends were added to the Taiwan corporate shareholder’s taxable income and taxed at the Taiwan CIT rate.

Interest income:

Interest received on commercial paper and certain other interest-bearing financial instruments is subject to WHT of 10% and 15%/20% for resident and non-resident taxpayers, respectively (see the Withholding taxes section). This income should be reported as current-year income, and the WHT paid can be deducted against the income tax payable.

Royalties and technical service fees:

Non-resident companies who receive royalties for licensing patents both registered in Taiwan and overseas, trademarks registered in Taiwan, and computer software copyright licensed to Taiwan companies, or who receive technical service fees in relation to construction of factories/plant/power plants to Taiwan companies incorporated as companies limited by shares, can apply for income tax exemption by obtaining advance approval from both the Industrial Development Bureau and the tax authorities. For licensing of patents and technical service fees, the Taiwan licensee company needs to be engaged in designated industries. The amendments to the relevant regulation governing the applicable criteria are effective retroactively for contracts concluded after 1 January 2011.

Foreign income:

Taiwan adopts a worldwide tax system to tax its resident companies (including the Taiwan subsidiaries of foreign companies). In theory, taxation on foreign investment income of a Taiwanese company is deferred until cash is repatriated to Taiwan. However, given Taiwan also taxes undistributed profits based on net income shown on the income statement (see Profit retention tax in the Taxes on corporate income section), foreign investment income may still be taxed in Taiwan before cash is repatriated back to Taiwan.

Corporate residence:

A company is a resident of Taiwan for CIT purposes if it is incorporated in Taiwan. A non-resident company that has an FPOB or business agent in Taiwan is obligated to file a CIT return in Taiwan on its Taiwan-sourced income.

Permanent establishment (PE):

The term 'permanent establishment' only exists in the underlying double tax agreements (DTAs) signed with Taiwan. Taiwan domestic tax regulations only refer to an FPOB and business agent, which generally follows the definitions of an FPOB and agency PE in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention.

Corporate – Deductions

Depreciation:

Depreciation on all fixed assets other than land, including premises, plants (buildings), and equipment, which are used to generate income, is allowed as a deduction. The straight-line, fixed percentage on diminishing book value, sum-of-years-digit, unit-of-production, and working-hour methods are acceptable depreciation methods to the tax office. The useful lives of typical assets are shown below:

Asset category
Useful life (years)
Computer equipment
3
Furniture and fixtures
5
Automobile
5
Building
50

With the approval of the tax authority, a company may revalue its fixed assets each time the government’s wholesale price index increases by 25% over the base period. A company’s base period is established at the time of purchase of fixed assets or at such time when a company revalues its fixed assets. Any increase in fixed assets may then be depreciated for tax purposes.

Goodwill:

Goodwill is commonly realised from merger and acquisition, which should follow the purchase method as defined under Taiwan Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Goodwill should be amortised for 15 years if a valuation report is issued by a creditable professional valuation firm and the net identifiable assets are valued separately. However, in practice, the amortisation of goodwill is frequently challenged by the Taiwan tax authority.

Start-up expenses:

Start-up expenses during the start-up period can be deducted in the year incurred. The start-up period is from the preparatory stage to the date the business starts to generate significant revenue from its primary business operation.

Interest expenses:

Interests on loans that are used for business purposes are deductible in the year incurred. However, for a loan from a non-financial institution, the interest rate shall not exceed 15.6% per annum. As for interest on inter-company loans, the deductible amount is subject to the thin capitalisation rule and transfer pricing regulations.

Bad debt:

Actual losses on bad debts are allowed for deduction when certain legal proceedings or time requirements have been satisfied. The loss should first be charged against the bad debt provision, which should not exceed either 1% of accounts receivable and notes receivable outstanding, or the actual average bad debt ratio for the past three years.

Charitable contributions:

Charitable contributions to support national defence, troop morale, contribution to government of any level, and donation made with special approval of the Ministry of Finance (MOF) are not subject to any tax limit. Donations to other parties are subject to prescribed limits under the relevant regulations.

Fines and penalties:

Fines and penalties arising from violation of various tax laws are generally not deductible.

Taxes:

All taxes, other than income tax, are generally deductible, unless where such taxes are related to tax-exempt income. The tax associated with the acquisition of real estate should be included in the cost of the land or building.

Net operating losses:

A company’s net operating losses can be carried forward for ten years. Losses cannot be carried back.

Payments to foreign affiliates:

Royalties, interest, and service fees paid to a foreign affiliate are subject to WHT. Royalties or service fees paid to a foreign entity may be tax-exempt if certain requirements are met and prior approval is obtained.

Tax administration

Taxable period:

The tax year in Taiwan runs from 1 January to 31 December. Businesses may request approval from the local collection authority to file CIT returns using a fiscal year-end other than 31 December.

Tax returns:

Tax returns are filed on a self-assessment basis. CIT returns are due no later than five months after the end of the tax year.

Payment of tax:

Tax is paid on a self-assessment basis in two instalments. The first payment is based on 50% of the tax liability of the prior year’s tax return and is made in the ninth month of the enterprise’s fiscal year. However, if the taxpayer meets certain requirements, it may self-assess the provisional tax based on the taxable income of the first half of the current fiscal year and deduct income taxes paid overseas against the provisional income tax payable if corresponding income is consolidated in the provisional tax return. The second payment is made at the time of filing the annual tax return. The returns are subsequently reviewed by the tax authorities, and a final assessment is issued.

Any overpaid tax as a result of the tax collection authority’s mistake shall be refunded to the taxpayer within two years of the tax authority’s acknowledgement of such mistake, and shall not be subject to the original five-year period for applying for refund where the taxpayer is responsible for the mistake.

Tax audit process:

Taiwan does not have a fixed audit cycle. Tax audit can be carried out any time prior to the expiration of the statute of limitations. Companies may be selected for audit if certain criteria are met.

Statute of limitations:

The statute of limitations in Taiwan is five years from the tax return filing date if the return is filed on time. Where a taxpayer fails to file an annual tax return within the statutory deadline or evades tax by fraud or any other unrighteous means, the statute of limitations is extended to seven years.

Tax ruling system:

Corporate taxpayers may file an advance tax ruling application with the tax authorities, together with the relevant supporting documents, to clarify their tax position before initiating the specific transaction. The tax authorities are obligated to issue a response within six months after submitting the application.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.







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This blog is Created by CA Anil Kumar Jain.