Tax Incentive Should Not Be Applicable to Foreign Enterprise’s Royalty Income Received.

Tax Incentive Should Not Be Applicable to Foreign Enterprise’s Royalty Income Received.

According to the National Tax Administration, 20% tax should be withheld from foreign enterprises’ royalty income received from business rights, trademarks, patents, or secret formulas being made available for use by other persons within the territory of Taiwan, while the 3.75% incentive rate provided in the first paragraph of Article 25 of the Income Tax Act should not be applicable to royalty income (business income tax rate 25%×15%＝3.75%).

According to the first paragraph of Article 25 of the Income Tax Act of Taiwan, Any profit-seeking enterprise having its head office outside the territory of the Republic of China, and which is engaged in international transport, construction contracting, providing technical services, or machinery and equipment leasing, etc., in the territory of the Republic of China, and the cost and expenses of which are difficult to calculate may apply for approval from the Ministry of Finance, or the Ministry of Finance may make the decision to consider 10% of its total business revenue for an enterprise engaged in international transport business, or 15% of its total business revenue for one engaged in any other businesses as its income derived within the territory of Taiwan regardless whether or not it has a branch office or business agent in the territory of Taiwan.  The actual tax rate is 3.75% only (business income tax rate 25%×15%＝3.75%).

It once occurred that the National Tax Administration (the Administration) examined a foreign company’s (Company A) application for approval of applicability of the incentive tax rate in accordance with the first paragraph of Article 25 of the Income Tax Act (the Act) and found that Company A provided its trademark and productive technology to a Taiwanese company for use and therefor received an agreed specific amount of royalty.  Judging from the signed contract and relevant documents submitted by Company A, the Administration determined that the revenues Company A has received from the Taiwanese company should be categorized as “royalty” as defined by the 6th subparagraph of Article 8 of the Act, from which the Taiwanese company should withhold a 20% tax.  The Administration thus denied Company A’s application on the ground that royalty income did not derive from its technical services that is subject to the incentive rate as defined by the first paragraph of Article 25 of the Act. 

Legally speaking, a foreign enterprise may apply the first paragraph of Article 25 of the Act to calculating its business revenue at the percentage as designated in this Article, provided that the services it provides must be technical services as defined by that Article.  However, where the revenue is an agreed and fixed amount calculated in terms of the sales amount, it should account for royalty income and should be deducted from the contract value; that is, only the income derives from technical services should be subject to a 3.75% incentive tax rate. 

Tax Rates Applicable to Business Revenue Received by Foreign Enterprises
Source of Income	Tax Rates	Applicable Law Articles
International transport	10% of Business Revenue	First paragraph of Article 25 of the Income Tax Act
Construction contracting, providing technical services, or machinery and equipment leasing	15% of Business Revenue	First paragraph of Article 25 of the Income Tax Act
Royalty received from business rights, trademarks, patents, or secret formulas being made available for use	20% of the Sum of royalty paid	The 6th subparagraph of Article 8 of the Income Tax Act
Source:  Taipei National Tax Administration

(2008.8)
/CCS