Step 5: Taxation of Companies, Partnerships and Sole Proprietorships in Taiwan

Step 5 of Good Earth CPA’s six-step guide to registering a business in Taiwan summarizes the taxes that apply to a new business: business income tax for companies, general partnerships and sole proprietorships, value-added tax (VAT), tax treaties and tax incentive schemes.

• Overview
• Business Income Tax for Companies
• Business Income Tax for General Partnership
• Business Income Tax for Sole Proprietorship
• Value Added Tax – Goods & Services Tax
• Tax Treaty
• Tax Incentive Schemes

Overview of Taxation in Taiwan for Foreign Investors

In general, Taiwan’s tax laws and tax rates, for both income tax and VAT (GST), are reasonable and friendly, but Taiwan is still a developing country in many respects, and tax is one of them. In many cases, tax litigation arises from situations that tax law has not clearly defined, which always creates red tape when a company applies the tax law to a transaction without consulting a reliable tax advisor.

For international transactions, a company must evaluate tax compliance from the point of view of Taiwan tax law, tax incentive schemes and tax treaties, and take into account the proficiency of the local tax officer in its jurisdiction with cross-border transactions.

To avoid, or at least reduce, the tax risks of a foreign investment, a foreign investor or his/her tax agent should always maintain a smooth relationship and communication channel with the local tax authorities, at either ministry level or city level.

Taiwan has one of the most competitive tax regimes in the world and a number of interesting tax incentive schemes to attract investors. However, any research prior to where to establish a business operation would not be complete without a thorough investigation of the tax impact. This should reflect the following:

• the tax aspects of the investor's home country
• the tax aspects in the country where the investment is made
• how the above tax regimes interact
• the tax impact to the individual taxation of executives

Taiwan taxes business entities on a residence basis: a business legal entity is taxed on its worldwide income. Foreign-source income is taxable; however, tax paid in another tax jurisdiction can be credited against Taiwan income tax.

Taiwan Income Tax Rates at a Glance

• Business income tax: 20%
• Resident individual income: 5% to 40%
• Non-resident individuals’ salary or remuneration: taxed at 6% or 18%
• Non-residents’ director’s fees, professional fees, consultation fees and all other income: taxed at 20%

Business Income Tax for Companies in Taiwan

Which Companies Are Taxed in Taiwan?

A company qualifies for taxation in Taiwan if:

• it is incorporated or registered under the Companies Act of Taiwan;
• it is a foreign company registered in Taiwan, such as a branch; or
• it is a foreign company incorporated or registered outside Taiwan.

Business Income Tax Filing Deadlines and Record-Keeping

Companies with a regular financial year, the calendar year, end the business operation period for each year on 31 December.

Companies with a special financial year end the business operation period for each year on the last day of a specific month.

Each company has to pay an estimate of its tax, known as provisional income tax, in September.

Each company is also required to declare its income by filing a Business Income Tax Return each year. The due date for filing the Business Income Tax Return is 31 May of each year.

A company must maintain proper records of its financial transactions, keeping the source documents, accounting records and schedules, bank statements and any other records of transactions connected with the business, and must retain these records for five years from the relevant year.

Business Income Tax Rate, Exemption and Dividends

The business income tax rate is 20% of net profit before income tax, and net profit before income tax of less than TWD120,000 is exempt. Taiwan adopts a one-tier corporate tax system under which tax paid by a company on its taxable income is the final tax. All dividends paid by a company to a Taiwan tax resident are exempt from tax in the hands of the shareholders; however, dividends paid to foreign shareholders are subject to 10% to 20% withholding tax, depending on the tax treaty.

A company is taxed at a flat rate of 20% on its net profit before income tax, including:

• income accruing in or derived from Taiwan
• income received in Taiwan from outside Taiwan
  1. gains or profits from any trade or business
  2. income from investment such as dividends, interest and rental
  3. royalties, premiums and any other profits from property
  4. other gains of an income nature

Capital gain such as gains on sale of fixed assets, except land, or gains on foreign exchange on capital transactions is taxable.

Deductions for Companies

• Productivity and Innovation Credit
• Business expenses
• Unutilised losses, qualified may be carried forward to 10 years.
• donations

Business Income Tax for General Partnerships in Taiwan

How Is a General Partnership Taxed?

As a partnership is not an entity in law, the partnership does not pay income tax on the income earned by the partnership. Instead, each partner will be taxed on his or its share of the income from the partnership based on his personal income tax rate.

Filing Requirements for General Partnerships

The partnership should decide on its accounting period when it first starts business. The accounting period is the period of trade for which the business calculates profits or losses.

A partnership must file Business Income Tax return in May, but it does not pay income tax on partnership; and it must prepare a Divisible Profit or Loss statement of the business which is then allocated to the partners.

Tax rates and deductions are the same as for a company, but there is no exemption.

Business Income Tax for Sole Proprietorships in Taiwan

How Is a Sole Proprietorship Taxed?

A sole proprietor is regarded as a self-employed person receiving business income derived from carrying on a trade, a business, a profession, or a vocation. Business income is taxable in the sole-proprietor's name and needs to be reported in his/her individual tax return, where it becomes subject to personal income tax rates.

Filing Requirements for Sole Proprietorships

The sole proprietorship should decide on its accounting period when it first starts business. The accounting period is the period of trade for which the business calculates profits or losses.

A sole proprietorship must file Business Income Tax return in May, but it does not pay income tax as a sole proprietorship.

Tax rates and deductions are the same as for a company, but there is no exemption.

Value-Added Tax (VAT) in Taiwan: Goods and Services Tax (GST)

Businesses in Taiwan need to register for VAT when they start to operate their business. VAT registration is mandatory.

In general, the standard VAT rate of 5% is levied on:

• the import of goods (collected by Taiwan Customs)
• supplies of goods and services in Taiwan

The VAT rate for exported goods and international services is zero.

Exemptions include:

• sales and leases of unfurnished residential properties
• the provision of most financial services
• Sale of goods delivered from overseas to overseas outside the scope of the VAT Act

A VAT-registered business must credit VAT output tax when making sales and debit VAT input tax on business purchases and expenses (including imported goods). At the end of each accounting period, a VAT return must be submitted to the VAT office. The difference between output tax and input tax is the net VAT payable, a VAT credit or refundable VAT.

Examples of VAT-Exempt Goods and Services in Taiwan

1. The sale of land.
2. The water supplied to farmland for irrigation.
3. The medical services, medicine, ward lodging and meals provided by hospitals, clinics and sanitariums.
4. The social welfare services.
5. The education services offered by schools, kindergartens.
6. Publication which are textbooks authorized by education authorities for use at various levels of schools.
7. The goods or services sold by student-run shops of vocational schools which do not serve outsiders.
8. Newspapers, magazines, newsletters, advertisements, television and broadcasting programs produced.
9. The proceeds from goods sold in tenders, charity sales and charity shows held by charity.
10. Services rendered by post and telecommunication offices.
11. The goods or services sold by peddlers or hawkers.
12. Feed and unprocessed raw agricultural, forestry, fishing and livestock products, and by-products; the agricultural, forestry, fishing and livestock products, and by-products of farmers' and fishermen's harvests sold by farmers and fishermen.
13. The fish caught and sold by fishermen.
14. The sales of rice and wheat flour and the service of husking rice.
15. The sales of fixed assets which are not regularly traded by business entities which compute their business tax according to Section 2 of Chapter 4.
16. The sales of weapons, warships, aircraft, tanks and reconnaissance communication equipment for military use to defense agencies.
17. Fertilizer, pesticides, veterinary drugs, agricultural machinery, transportation equipment for farmland.
18. Fishing boats for coastal or inshore fishery and machinery, equipment, nets and fuel oil used by fishing boats.
19. Gold bars, gold bricks, gold foil, gold coins and gold ornaments, excluding the processing fee.
20. The research services supplied by scientific or technological institutions which are established under the approval of the government.
21. The sales amount of operating financial derivatives products, corporate bonds, financial bonds.

Taiwan Tax Treaties (Double Taxation Agreements)

How Taiwan’s Tax Treaties Work

Taiwan has income tax treaties with a number of foreign countries; the tax treaties follow OECD Model Tax Convention on Income and on Capital. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from Taiwan income taxes on certain items of income they receive from sources within Taiwan. These reduced rates and exemptions vary among countries and specific items of income.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and Taiwan, you must pay tax on the income in the same way and at the same rates as a Taiwan individual or a business entity.

Treaty provisions generally are reciprocal (apply to both treaty countries). Therefore, a Taiwan citizen or tax resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries.

Foreign taxing authorities sometimes require certification from Taiwan Government that an applicant filed an income tax return as a Taiwan citizen or tax resident, as part of the proof of entitlement to the treaty benefits. Taiwan tax office requires the same certification, if a foreign individual or a business entity claims tax treaty benefits or exemption according to tax treaty for the income from the source of Taiwan.

Taxpayers should carefully examine the specific treaty articles that may apply to find out whether they are entitled to a:

• tax credit,
• tax exemption,
• reduced rate of tax, or
• other treaty benefit or safeguard.

When you plan to claim tax treaty benefits or an exemption, you may refer to the “Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income”.

List of ROC Taiwan Double Taxation Agreements

Tax Incentive Schemes for Investors in Taiwan

• Participating in a major infrastructure project, exempted from income tax for a maximum period of 5 years.
• Participating in a major infrastructure project, 5% to 20% of the certain expenditures incurred against the income tax.
• A biotech and new pharmaceuticals company, 35% of the amount of funds invested for R&D and personnel training against income tax.
• Investment on a public biotech and new pharmaceuticals company for a period of 3 years, 20% of the investment may be income tax credit.
• Stock issued by a biotech and new pharmaceuticals company to high-level executives and technology investors in return for their knowledge and technology shall be excluded from the amount of their individual or business income tax.
• Companies limited by shares may credit up to 20% of the amount of funds invested for construction of new towns against income tax.
• Company limited by shares operates in a designated tax-reduction area may credit up to 20% of the total amount of investment for brand-new machines, equipment and buildings against income tax.
• Company limited by shares invests in the urban renewal business on designated area by City or County; the legal entity shareholder may credit up to 20% of the investment against income tax.
• Tourism enterprises may credit 10% to 20% of the expenses for international tourism and promotion campaigns against the income tax payable.
• Companies may credit up to 15% of the amount of funds invested for R&D having industrial innovation nature against income tax payable.
• Foreign enterprise or a branch office process goods in the free trade zone, the income derived from exporting the finished goods is exempt from income tax.

Good Earth CPA’s Step-by-Step Guide to Business Registration in Taiwan

This guide provides a structured approach to starting various types of businesses, such as a branch office, a representative office, a private limited liability company or a company limited by shares as a subsidiary, a general partnership, a limited partnership, or a sole proprietorship for registration in Taiwan.

Step 1: Decide on a Business Structure
Step 2: Get Chinese and English Company Name Approval
Step 3: Find Premises
Step 4: Obtain Registration, Incorporation and Permit
Step 5: Taxation
Step 6: A case study: Registering a Private Limited Liability Company