Certain tax incentives are provided to investors if they are located in prescribed areas, such as science parks, export processing zones, free-trade-zones, etc. Other tax credits are granted to qualifying companies that invest in specific businesses or industries promoted by the government, such as biotech.
Research and development (R&D) tax incentives
Under the Statute for Industrial Innovation (SII), R&D credits are available for up to 15% of qualified R&D expenses incurred, with the maximum amount of tax credit capped at 30% of the tax payable for the year in which the expenses were incurred, including the 5% profit retention tax.
Effective from 1 January 2016 to 31 December 2029, amendments to the SII provide another alternative for companies to claim an R&D credit of 10% of qualifying R&D expenses against income tax payable within a period of three years, starting from the current year. In addition, effective from 1 January 2016 to 31 December 2019, to facilitate the circulation and application of innovative R&D results, and to promote industrialisation of innovative technologies, where individuals/companies derive income from transfer or license of their self-developed intellectual property (IP), the amendments also allow the individuals/companies to either deduct qualifying R&D expenses of up to 200% (capped at corresponding income received) within the current year or claim R&D tax credits against income tax payable.
Moreover, according to the Statute for Development of Small and Medium Enterprises (SMEs), enterprises qualifying as SMEs may elect one of the following methods to calculate R&D credits, subject to the 30% cap mentioned above:
- 15% of qualified R&D expenses for the current year, with credits limited to the same year, or
- 10% of qualified R&D expenses for the current year, which can be carried forward for two ensuing years.
According to Regulation Governing R&D Investment Tax Credit (ITC) Available to Profit-seeking Enterprises, a single annual application for R&D ITC should be made with the central competent authorities within four months prior to the CIT return filing due date. Information relating to R&D ITC should be provided with the CIT return.
Other tax incentives
The Legislative Yuan passed the third reading on amendments to the Statute for Industrial Innovation. In addition to providing a ten-year extension for the existing five major tax incentive items, 'deduction of actual investment from tax base of profit retention tax' and 'tax credit for smart machinery and 5G system expenditures' were added as new incentive items. Salient points of the additional tax incentives are as follows:
|Tax credit for smart machinery and 5G system implementation expenditures
- Estimated effective period: 1 January 2019 through 31 December 2022 (applicable to smart machinery and 5G expenditures in the first three years; applicable to 5G expenditures only in the fourth year).
- Tax credit of up to 5% of expenditures, creditable against current year CIT payable; or tax credit of up to 3% of expenditures, creditable against CIT payable within three years.
- Tax credit shall not exceed 30% of current year CIT plus profit retention tax payable.
|Deduction of actual investment from tax base of profit retention tax
- Deduction of actual investment from tax base of profit retention tax if actual investment within three years reaches a certain threshold.
- Scope of 'actual investment' tentatively includes purchase of factories, machinery and equipment, and software, hardware, and technical services related to construction projects.
Tax concessions on merger
A number of tax incentives are available under the Mergers and Acquisitions (M&A) Act to encourage M&A activities in Taiwan. Certain taxes, including business tax, deed tax, LVIT, securities transaction tax, and stamp tax, may be exempted or deferred in case of acquisitions, mergers, or corporate divisions (including spin-offs) that meet certain conditions.
After the merger, spin-off, or acquisition, any tax concession previously enjoyed by the merged entities will continue to be applicable to the surviving or newly-created company. However, it is required to manufacture the same products or provide the same services that were originally approved for tax concessions by the merged entities in order to continue the concessions obtained previously.
The unexpired and unutilised net operating losses of the participating entities prior to the merger or spin-off may be carried over to the surviving or newly-created entity according to the percentage of shareholding in the surviving or newly-created company held by all shareholders of the participating entities.
Income tax exemption is available if the shares acquired by a company as a result of transfer of its entire or substantial portion of business or assets to another company, or due to spin-off, is greater than 80% of the consideration of the entire transaction, and all the shares so acquired have been transferred to the shareholders of the transferor.
According to the Statute for the Establishment and Management of Free-trade-zones, companies (both domestic and foreign) that solely perform preparatory or ancillary activities within Taiwan and engage in or appoint a free-trade-zone entity to engage in procurement, importation, storage, or delivery activities within a free-trade-zone can apply for income tax exemption on the income from sales of goods.
Foreign tax credit
Taiwan uses the credit method to avoid double taxation of income. Foreign taxes paid on foreign-sourced income may be credited against a company’s total Taiwan income tax liability. However, the credit is limited to the incremental taxes derived from the foreign-sourced income.