A glance at withholding tax exemptions on royalties, renumeration, technical service fees, and commissions paid by Taiwan company to foreign company

Yenjiun Chiou, CPA ｜ January 26, 2024

In nowadays business world, it is common for companies to seek mutual complement through international cooperation. Cooperation is wonderful and someone is doing something right. Like it or not, however, as the saying goes, “A fine is a tax for doing something wrong. A tax is a fine for doing something right.”

When a Taiwanese company pays a foreign company that does not have a fixed place of business in Taiwan (the “Foreign Company”), it is not necessarily subject to 20% withholding tax (the WHT), and yet it depends on what nature of the income is, what residency status of the recipient is, and whether there is a Tax Treaty between the countries.

The following table summarizes the withholding regulations in Taiwan for four common types of income from international cooperation, including royalties, renumeration, technical service fees, and commissions. Tax exemption or reduction may be applicable in your circumstances. If there is a tax refund eligible, remember to apply for it before the deadline.

* Service types such as planning, design, installation, testing, maintenance, commissioning, consulting, auditing, supervision, certification, and personnel training that comply with the principles for reviewing cases of calculating income under Article 25, Paragraph 1 of the Foreign Profit-Seeking Enterprise Income Tax Act.

Note 1: “Foreign Company” that provides labor services entirely outside Taiwan and receives renumeration of professional practice is exempt from the WHT.

Note 2: “Foreign Company” can apply for tax exemption for business profits under the Tax Treaty. If 20% of the total amount had been paid as the WHT, once the application has been approved, 100% of the WHT will be refunded.

Note 3: “Foreign Company” can apply for the application of Article 25, Paragraph 1 to reduce the effective tax rate from 20% to 3% on the technical service fees. If 20% of the total amount had been paid as the WHT, once the application has been approved, 85% of the WHT will be refunded.

Note 4: Service for promoting goods provided outside Taiwan is tax-free and the pay is exempted from the WHT.

Lastly, we look at the withholding exemption on paying royalties to a foreign company. In general, there is limited applicability of exemption on the income of royalties unless a Tax Treaty is in between. However, if you meet the requirements of Article 4, Paragraph 1, Item 21 of the Income Tax Act, even there is no Tax Treaty between the countries, you can apply for a 'tax exemption certificate' first, and then apply to the National Tax Bureau for an exemption of the royalties WHT on the basis of the 'tax exemption certificate.'

A Taiwanese company paying a “Foreign Company” ahead of the exemption approval is still required to pay the WHT in full within 10 days of the payment. After the approval of the tax exemption, the “Foreign Company” can apply for a WHT refund.

Applying for the WHT refund may be complicated. If you need a tax professional to assist you, send us an email.