Change to the corporate income tax (CIT) rate, profit retention tax rate, and dividend withholding tax (WHT) rate
On 18 January 2018, the Legislative Yuan passed amendments to the Income Tax Act, increasing the CIT rate from the previous 17% to 20% and reducing the profit retention tax on undistributed earnings from the previous 10% to 5% for income earned from taxable year 2018 onwards. For companies having taxable income less than 500,000 new Taiwan dollars (TWD), the CIT rate will increase gradually by 1% per year from 2018 onwards up till 20%.
Further, the dividend WHT rate for foreign shareholders is increased from 20% to 21%. For dividends distributed to foreign shareholders, the profit retention tax on undistributed earnings can no longer be credited against dividend WHT, with the exception of 2018 (i.e. dividends distributed in 2018 can still utilise the tax credit).
New income tax system for provision of cross-border electronic services after 1 January 2017
A new tax system has been implemented to address income tax treatment of remuneration derived by foreign enterprises from provision of cross-border electronic services to Taiwanese consumers (including individuals and profit-seeking enterprises and organisations). This new tax system provides rules governing determination of Taiwan-sourced revenues, calculation of taxable income, and methods of taxation, and is effective from 1 January 2017 onwards.
Depending on the business model and situation of the taxpayer, costs/expenses can be deducted and the taxable income can be further reduced via use of a ‘contribution ratio’. Therefore, going forward there may be annual compliance requirements that need to be fulfilled.
Three tier transfer pricing documentation
Starting from 2017, in addition to the already required transfer pricing report, corporations will also need to provide a Master File and a Country-by-Country Reporting (CBCR) file. See the Group taxation section for more information.
Common Reporting Standard (CRS)
The Tax Collection Act was amended in 2017 to provide a legal basis for adoption of the OECD’s Common Reporting Standard (CRS) regarding the automatic exchange of information with other tax jurisdictions. Taiwan will implement CRS from 2019, with the first exchange of information in 2020. Also, Taiwan signed in 2016 an agreement with the US to allow financial institutions to register with and disclose to the US tax authority under the US Foreign Account Tax Compliance Act.
Anti-tax avoidance rules
The Income Tax Act was amended in July 2016 to include anti-tax avoidance rules in Article 43-3 (Controlled Foreign Company [CFC]) and Article 43-4 (Place of Effective Management [PEM]) of the Income Tax Act.
In general, profits retained at the CFC level, which is located in a low tax rate jurisdiction and without commercial substance, will be taxed in advance at the Taiwan parent company level. In the past, taxation of foreign investment income was deferred until the Taiwan parent company received dividend income. Going forward, qualified investment income will be deemed distributed and taxable in Taiwan in advance. The Regulations Governing Controlled Foreign Companies were announced by the MoF on 31 May 2017.
For PEM rules, under this new tax regime, if a foreign company meets all three criteria triggering the PEM definition, including (i) decision making location, (ii) record keeping and maintenance location, and (iii) actual operating location are all in Taiwan, the foreign enterprise will be deemed as having its head office in Taiwan and will be subject to tax assessment in accordance with the Taiwan Income Tax Act and other tax regulations. The Regulations Governing Places of Effective Management were announced by the Ministry of Finance in May 2017.
However, the CFC and PEM taxation mechanisms have yet to take effect. The Legislative Yuan passed The Management, Utilization, and Taxation of Repatriated Offshore Funds Act. The effective date of said Act is 15 August 2019. After said Act is implemented for two years, the MOF shall propose to the Executive Yuan for approval within one year the effective date for implementation of the Taiwan CFC regime.
Recently, Taiwan’s tax treaty network has increased to include treaties with Canada, Japan, Poland, and the Czech Republic. Apart from Czech Republic, the treaties have all come into effect as of 1 January 2020. The treaty with the Czech Republic will become effective as of 1 January 2021. Taiwan has also signed a treaty with China; however, this tax treaty has not yet come into effect.