How Foreign Companies Can Use Taiwan Tax Treaties

Learn how foreign companies can use Taiwan’s tax treaties (DTAs) to reduce withholding tax risks, and ensure full legal compliance.

In a recent case reported by China Times, a German e-commerce company was found liable for owing NTD 3.35 million in taxes and was pursued by the Administrative Enforcement Agency, Taipei Branch. This case highlights the increasing scrutiny by Taiwan's tax authorities and the necessity for foreign companies to obtain proper professional legal and tax advice. If the company had sought appropriate legal counsel and implemented proper compliance measures, the tax burden and subsequent enforcement actions might have been avoided.

This article explains how foreign companies can proactively use tax treaties (“Double Taxation Agreements,” or DTAs) to legitimately optimize their tax positions under Taiwanese law, while minimizing the risk of tax disputes and unexpected liabilities.

Importance of Understanding Taiwan's Business Profits Taxation Rules

Under Taiwan's Income Tax Act, foreign enterprises earning Taiwan-sourced income without a permanent establishment (“PE”) are generally subject to withholding tax on gross income at a flat rate (usually 20%). However, many of Taiwan's tax treaties^[1] provide that “business profits” are taxable in Taiwan only if the foreign company has a PE in Taiwan. Without a PE, no Taiwan tax should be imposed on business profits.

Recent enforcement trends show that Taiwan's National Taxation Bureau (NTB) is increasingly requesting evidence to substantiate claims that the income is “business profit” rather than other types of Taiwan-sourced income (such as service income or royalties).

Key Compliance Steps for Foreign Companies

To properly apply a DTA and avoid Taiwan withholding tax, foreign companies should:

Provide proper documentation

Submit a Certificate of Residence and the required application forms to claim treaty benefits.

Demonstrate lack of PE

Prepare contracts, work descriptions, communication records, and other evidence proving that no PE was created in Taiwan (e.g., no fixed office, no local employees, and no agents with contracting authority in Taiwan).

File in advance

Ideally submit treaty exemption applications before or shortly after income arises, rather than retroactively after an NTB investigation begins.

Risks of Non-Compliance or Misclassification

Failing to properly document and apply for treaty benefits can lead to serious consequences, including:

• Retroactive assessments of 20% withholding tax on gross revenue
• Additional fines or surcharges
• Damage to business reputation

Practical Recommendations

To avoid tax risks and optimize Taiwan tax treatment, we recommend that foreign companies:

• Conduct a Taiwan PE risk analysis before signing contracts or providing services
• Structure contracts carefully to clarify the nature of services and the lack of PE
• Obtain professional legal and tax advice to assist with DTA application filings
• Monitor ongoing activities in Taiwan to ensure no PE is inadvertently created

Conclusion

Taiwan offers many treaty-based opportunities for foreign companies to minimize tax exposure legally. However, proper planning, timely compliance, and professional documentation are critical to benefit from these opportunities. By proactively managing tax treaty applications, foreign businesses can operate in Taiwan with greater certainty and lower risk.

Should you require any assistance in reviewing your Taiwan operations, assessing permanent establishment risks, or preparing DTA exemption applications, our team stands ready to support you with tailored legal and tax solutions.

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[1] DTA with Singapore: AGREEMENT FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME (link); DTA with United Kingdom: Agreement between the British Office Taipei and the Taipei Representative Office in the United Kingdom for the elimination of double taxation with respect to taxes on income and on capital gains and the prevention of tax evasion and avoidance (link)