Tax Credits to Foreign Entities With Respect to Services Provided Abroad.

The Ministry of Finance issued a decree to clarify the scope of “Taiwan-source income”, relaxing the standards of determination of such income earned by foreign entities.  Under the relaxed standards, Taiwan-source income will be interpreted broadly.  Remunerations for services rendered overseas will be exempted from income tax, and the cost and expenses related to business profits made in Taiwan are to be deducted to recalculate the taxable income.  This should be able to reasonably mitigate tax burden on foreign entities.

20% tax was required to be withheld from Taiwan-source income made by foreign entities without fixed place of business or business agent in Taiwan.  From now on, the new policy should operate in the way that foreign entities may apply with tax authorities for a refund of excess tax payment, if any, of withholding tax by deducting costs and expenses related to the income, provided that the foreign entities shall bear the burden of proof by justifying such costs and expenses.

The Ministry of Finance promulgated the “Principles for the Determination of Taiwan-Source Income under Article 8 of the Income Tax Act” with the following main points:

1.  The place where service is rendered and carried out should be recognized the place where service income is recognized:

In consideration of the indivisible characteristic of transaction, where service is simultaneously performed within and without Taiwan or requires participation and assistance provided by Taiwanese residents or profit-seeking enterprises, the remuneration derived from the service should be determined as Taiwan-source income.  Further, if the service is carried out inside and outside Taiwan, the entity may allocate the income into Taiwan-source and non-Taiwan-source by separating and proving the exact and relative amount of the income derived from Taiwan.

2.  Allocation of business profits:

With respect to a foreign entity’s profits gained in Taiwan from its main business items, if the foreign entity renders services inside and outside Taiwan and can provide documentation to specifically identify which services are provided inside and which are outside Taiwan, the Taiwan tax authorities can calculate and assess profits attributable to Taiwan-source profits.

3.  Multiple categories of income: 

If a foreign entity provides comprehensive services in Taiwan and the nature of the services render multiple categories of income, such as, patent practice, provision of services and lease of equipment, etc., Taiwan tax authorities must classify the income into appropriate categories according to their specific nature.

4.  Deduction of relevant costs and expenses of income: 

A foreign profit-seeking enterprises that has no fixed place of business nor business agent in Taiwan and receives remuneration for services, lease income, business profits, reward in competitions, or other income may, within five (5) years of receiving that income, apply to the tax authority to deduct the costs and expenses related to that income.

The foregoing standards are applicable to Chinese, juristic persons, groups, or other institution that receive Taiwan-source income.  (2009.09)
/CCS