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 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.
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 (see the Other taxes section).
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 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.
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.