A Guide for Business and Investment
Doing Business in Taiwan
Foreword
Taiwan boasts one of the most dynamic, outward-oriented and technologically-advanced economies in the world, and being located at the heart of East Asia’s strategic trade routes makes it a convenient base from which to access the region’s production resources and burgeoning market opportunities. A growing number of multinational companies have chosen Taiwan as the location for their regional R&D centres and logistics hubs serving Asian markets. Others are partnering with Taiwan companies to develop business and investment opportunities in China in view of the increasing liberalisation of links across the Taiwan Strait. Foreign participation in Taiwan’s service markets has also increased greatly thanks to the island’s membership in the World Trade Organisation. This introductory guide is targeted at organisations doing business or looking to invest in Taiwan. It updates the previous version published in March 2009 to include significant changes in various laws and regulations as a result of the government’s tax reform programme. PricewaterhouseCoopers Taiwan is well placed to advise you on the latest developments, having been recognised by the International Tax Review as the “Taiwan Tax Firm of the Year” in 2009.
PricewaterhouseCoopers Taiwan celebrates its 40th anniversary in 2010 as one of the leading professional service firms in Taiwan. More than 2,000 people in eight offices island-wide provide a wide range of services to help organisations solve business issues, identify opportunities and maximise performance. Each line of service is staffed with highly qualified, experienced professionals and leaders in our profession. These resources, combined with our strong global network of member firms, allow us to provide the professional service support you need in Taiwan and the Greater China area. At PricewaterhouseCoopers Taiwan you can be sure of personal attention, professional dedication and expert advice. We would be delighted to provide advice and assistance tailored to the specific needs of your company, and invite you to contact us for further details. (Full details of our services and contacts are provided in Chapter 8 of this publication.)
Chairman and Territory Senior Partner PricewaterhouseCoopers Taiwan
Doing Business in Taiwan | 1
Table of contents Chapter
Page
1. Investment environment ................................................................................. 4 2. Business formation and the regulatory environment ..................................... 12 3. Labor-related health insurance, pensions and labor regulations.................... 20 4. Audit requirements and accounting practices ............................................... 26 5. Business taxation ........................................................................................... 32 6. Personal taxation ............................................................................................ 48 7. Other taxes ..................................................................................................... 56 8. Introduction to PricewaterhouseCoopers ...................................................... 60 Appendix: Other useful contact information....................................................... 64
Publication date: March 2010. This “Doing Business in Taiwan� publication is based on the prevailing laws and practices in Taiwan as of the end of 2009, and has been prepared as a guide only. Professional advice should always be sought before acting on any information contained in this publication. Please see the general disclaimer on the back cover.
Doing Business in Taiwan | 3
Investment environment
1 Chapter
4 | Doing Business in Taiwan
Taiwan is one of the world’s trading powerhouses and offers one of the most favourable environments for investment in Asia. This chapter provides a general overview of Taiwan’s investment environment and includes updates on more recent developments. For a deeper understanding of investment conditions in Taiwan, prospective foreign investors are recommended to consult the government’s dedicated English language website “Invest in Taiwan” at http://investintaiwan.nat.gov.tw. This chapter covers the following: • Location and climate • People and languages • History and political background • Industrial structure • International trade • Foreign exchange controls • Foreign investment • Tax reforms • Principal government agencies
Location and climate Taiwan is an island nation situated off the southeast coast of China between Japan and the Philippines. It comprises the main island of Taiwan, the islands of Penghu, Kinmen, and Matsu, and a number of other small islets. Its combined area is approximately 36,000 square kilometres, or slightly smaller than the Netherlands. The main island of Taiwan is 394 kilometres long and 140 kilometres wide and much of the terrain consists of steep mountains. Taiwan's climate is marine tropical to subtropical. It has a rainy season that lasts from January to late March, and also experiences frequent rainfall during the meiyu (plum rain) season in May. Taiwan experiences hot, humid weather from June until September, while temperatures are generally mild from October to May. Typhoons are common from July to October.
People and languages Home to some 23 million people, Taiwan is one of the most densely populated
countries in the world, with around 630 people per square kilometre. Ethnically, the people of Taiwan consist of a Han Chinese majority and an indigenous minority that is linguistically Austronesian. For its size, Taiwan is an unusually multilingual country. Mandarin Chinese is the official language, yet Taiwanese (also known as Minnan or Hoklo), spoken by people of Fujianese origin or descent, is widespread. Hakka is spoken within Hakka communities, while each of Taiwan's officially recognized 14 indigenous groups has its own language. Meanwhile, English and Japanese are very much in use as second or third languages. English is a compulsory subject from elementary school onward, and proficiency levels are steadily improving.
History and political background Taiwan was colonized by the Dutch in the 17th century, followed by an influx of Han Chinese from southeast China. In
Investment environment | 5
1662, Koxinga, the leader of a resistance movement against the Manchu Qing Dynasty, defeated the Dutch and established a base of operations on the island. Koxinga’s forces were later defeated by the Qing Dynasty, which ruled Taiwan for two hundred years before it ceded the island to Japan at the end of the Sino-Japanese War of 18941895. Following the Second World War, the Republic of China (ROC) under the Kuomintang (KMT) became the governing polity on Taiwan. In 1949, after the end of the Chinese civil war, the KMT withdrew to Taiwan and ruled it under martial law as a single-party state for forty years. From 1989, a series of constitutional reforms was undertaken that transformed Taiwan into a representative democracy, culminating in the first-ever direct presidential election in 1996. Taiwan’s political structure consists of a president and vice-president directly elected by popular vote, along with
6 | Doing Business in Taiwan
five branches of central government— the Executive, Legislative, Judicial, Control and Examination Yuans. The president presides over the Executive Yuan (the cabinet), which reports to the Legislative Yuan (parliament). After eight years in opposition—to the Democratic Progressive Party administration of former President Chen Shui-bian—the KMT regained the presidency in May 2008, at which time it also held a large parliamentary majority. Taiwan’s unsettled relationship with China has long been a major cause of domestic political uncertainty and an economic impediment, as the ROC is not recognised by most of the world as a sovereign entity separate from China. The current KMT government, however, has followed a policy of rapprochement with China and liberalisation of economic, transportation and travel links across the Taiwan Strait. This policy is helping position Taiwan as a convenient base from which to serve the Greater China markets, and in turn enhances its attractiveness for foreign investors.
Since President Ma Ying-jeou took office in May 2008, Taiwan and China have signed a series of technical accords on cross-Strait cooperation ranging from direct flights to financial sector opening. Both sides have also begun negotiations on a wide-ranging trade pact called the Economic Cooperation Framework Agreement (or ECFA for short), which would be a significant step towards normalising economic ties between Taiwan and its largest trading partner.
Industrial structure Despite its diplomatic isolation, Taiwan has become a force to be reckoned with among the world’s leading trading nations. It currently is the 26th largest economy in the world, according to International Monetary Fund statistics, and consistently scores very high in global competitiveness rankings by leading economic organisations such as the World Economic Forum (placing Taiwan 12th among the 133 world economies covered in 2009).
Since the 1950s, Taiwan has evolved from an agrarian economy based on rice and sugar to one focused on capital- and technology-intensive industries, as well as creative industries. Agriculture now constitutes just 1-2% of gross domestic product, down from 35% in 1952, while manufacturing and services account for 30% and 69%. Taiwan is now one of the world’s largest manufacturers of computer-related products, and has become a leading global producer of semiconductors and liquid crystal display (LCD) products.
Production of higher-end goods such as semiconductors and LCDs has largely remained in Taiwan, as have local firms’ R&D facilities. The government has also encouraged multinational companies to establish their regional R&D centres on the island.
In the late 1980s, facing rising costs, Taiwan’s manufacturing industries began to move their production bases overseas. Initially, most relocated to countries in Southeast Asia, but after Taiwan’s government began to ease restrictions on economic ties with the People's Republic of China in the early 1990s, China became the investment location of choice. High-tech firms have since joined more labour-intensive industries in shifting capacity to China, encouraged in part by the Taiwan government’s gradual easing of restrictions on technology transfers to the mainland.
More recently, the government has been promoting the development of six emerging industries (biotechnology, medicine and health care, culture and creativity, tourism, green energy and high-end agriculture) and four "intelligent" industries (cloud computing, smart electric vehicles, smart green buildings and patent commercialisation), and offering new incentives to attract domestic and foreign private-sector investment in these target sectors.
Notwithstanding the industrial migration to China, Taiwan remains an important hub for high-tech sector activities.
In addition to the high-tech sector, the Taiwan government has successfully encouraged the growth of a domestic petrochemicals industry. Other important industries include cars (mostly auto electronics, components and assembly), steel, textiles, plastics and machinery.
International trade Foreign trade has been the engine of Taiwan's rapid economic growth since the 1960s. The economy remains export-oriented, so much so that Taiwan
Investment environment | 7
depends on an open world trade regime and remains vulnerable to downturns in the global economy. In 2008, Taiwan ranked the world’s 17th largest trading entity, according to the World Trade Organisation (WTO). Bilateral economic relationships with other countries have benefited from Taiwan’s membership in the WTO (since January 2002, under the title of “The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu”) by further deepening its integration into the global economy and opening up its domestic market to foreign investment, products and services. In January 2009, Taiwan officially joined the WTO’s Government Procurement Agreement, which now grants foreign contractors access to procurement opportunities, such as the “i-Taiwan 12 Projects”—the ‘i’ indicating an emphasis on investment and infrastructure—which the government launched in 2009 to stimulate the island’s recession-hit economy.
8 | Doing Business in Taiwan
Foreign exchange controls Taiwan has substantially liberalized its foreign exchange controls. All foreign exchange transactions are administered by the Central Bank of the Republic of China (Taiwan), which imposes a limit of US$50 million and US$5 million per year for business entities and resident individuals, respectively, on any foreign exchange transfer, inward or outward, other than trading or service revenue. Companies and individuals are required to report certain foreign exchange transactions to the central bank.
Foreign investment Taiwan welcomes foreign direct investment, except in a limited number of industries involving national security and environmental protection. Liberalization has reduced the "negative" list for investment by foreigners and overseas Chinese—which can be found at www. moeaic.gov.tw—to less than 1% of manufacturing categories and less than 5% of service industries. Also, most
foreign ownership limits have been removed, though several restrictions still remain on mainland Chinese investment into Taiwan. The improvement in relations with China, continued deregulation and streamlined procedures for setting up operations on the island, along with a series of tax reforms, have made Taiwan a more attractive place for business investment. Its 2009 ranking in the World Bank’s “Ease of Doing Business” index jumped 15 places to 46th place among the 183 territories covered. The government also offers various attractive incentives to make Taiwan more investor-friendly, with foreign investors enjoying the same rights and privileges as local investors. These incentives are generally in the form of tax breaks aimed at encouraging investors to step up their capital investment, R&D and human resource cultivation in Taiwan. Most of the tax breaks were previously offered under the Statute for Upgrading Industries (SUI), which expired at the end of 2009. This law will be replaced by
a new Statute for Industrial Innovation, which will provide reduced tax rates for eligible companies and retain existing tax incentives for R&D, the cultivation of talent, and the establishment of operational headquarters and international logistics and distribution centres in Taiwan. Additional incentives for eligible direct investors are available under the Statute for Investment by Foreign Nationals/ Overseas Chinese, the Business Mergers and Acquisitions Act, the Financial Institutions Merger Act and other laws and regulations.
Tax reforms The government has endeavoured to overhaul Taiwan’s taxation system under the principle of “a simple, low-tax system.” In June 2008, it formed a Tax Reform Committee (TRC) to advise on a series of tax-reform proposals by the end of 2009, when the committee formally ended its operations. In line with the recommendations of the TRC, the government has passed several
new tax laws and regulations aimed at improving fairness and administrative efficiency and broadening the tax base. Among the key changes was a reduction in Taiwan’s corporate income tax rate to 20% from 25%, effective from 1 January 2010, to help neutralise the adverse effects of the SUI’s expiration and to enhance the competitiveness of Taiwan’s tax and investment environment. Notwithstanding the dissolution of the TRC, the government has said it will pursue further tax reforms in 2010 and beyond. Since this edition of “Doing Business in Taiwan” has been updated to reflect the latest changes in Taiwan’s tax laws and regulations only to the end of 2009, we recommend that you subscribe to “Taiwan Tax Updates”, a monthly English publication produced by PricewaterhouseCoopers Taiwan, to stay abreast of any new tax developments.
Principal government agencies For companies looking to do business or invest in Taiwan, the main regulatory
Investment environment | 9
agencies and their areas of jurisdiction are as follows (see the Appendix for full contact details): • Ministry of Economic Affairs: The MOEA is responsible for issuing business laws and regulations. Three of its most important agencies for investors are the Department of Commerce, the Investment Commission, and the Industrial Development Bureau: —— Department of Commerce reviews applications for company registration, including the establishment of branch offices and subsidiaries of foreign-owned entities. —— Department of Investment Services promotes and facilitates foreign investment in Taiwan, and also acts as a coordinator between investors and all agencies involved in the investment process. —— Investment Commission is responsible for matters relating to the screening and approval of inward investment and technical cooperation by foreigners and
10 | Doing Business in Taiwan
overseas Chinese, as well as outward investment from Taiwan. —— Industrial Development Bureau is responsible for promoting industry upgrading and providing comprehensive assistance to investors to overcome investment obstacles. • Bureau of Foreign Trade: The BOFT is an agency of the MOEA charged with executing trade policies and promoting trade. It is responsible for regulations covering all import and export activities, and for supervising the import and export of controlled items. • Taiwan Intellectual Property Office: The TIPO is an agency of the MOEA and deals with patent, trademark and copyright matters, as well as the enforcement of intellectual property rights. • Financial Supervisory Commission: The FSC is an independent, cabinetlevel authority charged with the supervision and examination of the banking, securities and insurance industries, as well as financial holding companies. The FSC comprises
four bureaus: Monetary Affairs, Securities and Futures, Insurance and Examination. • Ministry of Finance: The MOF is responsible for the administration of taxation, customs and the national treasury, as well as the management of state property. The Taxation Agency is an administrative authority directly subordinate to the MOF and is in charge of taxation matters, including tax auditing. Five tax collection agencies are also under the supervision of the MOF. • Fair Trade Commission: The FTC is in charge of competition policy and fair trade law. It also investigates and handles various activities that may impede competition, such as monopolies, mergers, and restraints on competition or unfair trade practices.
food and pharmaceutical products in Taiwan. • Environmental Protection Administration: The EPA is the agency responsible for protecting and conserving the natural environment in Taiwan. It sets pollution control regulations and carries out various programmes to monitor and protect the environment. • Council for Labor Affairs: The CLA is in charge of administering labor policies and regulations covering labor rights, labor security, labor insurance, work quality, and so on. It is also responsible for issuing work permits for foreign professionals.
• Food and Drug Administration: Taiwan’s FDA was formally inaugurated on 1 January 2010 and integrates four existing agencies under the cabinet-level Department of Health. The FDA’s responsibilities cover the licensing and inspection of
Investment environment | 11
Business formation and the regulatory environment
2 Chapter
12 | Doing Business in Taiwan
There are relatively few obstacles to establishing a business in Taiwan. Foreign investors can set up their Taiwan office as a wholly-owned subsidiary, joint venture, branch or representative office, depending on the activities and operations they intend to carry out. Mergers and acquisitions are also an option, though there may be fair trade and antitrust issues in some cases. The protection of intellectual property rights (IPR) is also often an important concern for prospective investors. This chapter covers the following: • Business formation structures • Capital market investment • General regulatory environment • Competition and antitrust policy • Merger and acquisition rules • Court system and arbitration • Intellectual property rights
Business formation structures Foreign investors that need to have a physical presence in Taiwan may
choose between a company, branch, representative office or job-site office at the formation stage. Company (subsidiary) A company is an incorporated entity with a legal status separate and distinct from its owners that allows it to sue and be sued in its own name. Taiwan’s Company Law provides for four organisational forms: • Unlimited company: A company organised by two or more shareholders who bear unlimited joint and several liability for the discharge of the company’s obligations; • Unlimited company with limited liability shareholders: A company organised by one or more shareholders of unlimited liability and one or more shareholders of limited liability. Shareholders with unlimited liability bear unlimited joint and several liabilities for the obligations of the company, while shareholders with limited liability may be held liable up to the amount of capital each has subscribed;
• Limited company: A company organised by one or more shareholders, with the liability of shareholders limited to the respective amounts of capital they have subscribed; and • Company limited by shares: A company organised by two or more shareholders, or one governmental or corporate shareholder, with the liability of shareholders limited to the amount of share capital each has subscribed. Except in certain restricted industries, foreign investors are generally allowed to set up companies in any of the above classes after obtaining approval from the Ministry of Economic Affairs' Investment Commission (MOEAIC). Any company that receives approval from the MOEAIC is called a Foreign Investment Approved (FIA) company. Branch A foreign company may open a branch office to do business in Taiwan after obtaining recognition from the MOEA and completing the procedures for branch office registration. To receive
Business formation and the regulatory environment | 13
recognition, a foreign company must have its incorporation registered in its own country and conduct its business operations there. There is no minimum working capital requirement if the branch’s activities relate to international trade, but a foreign company’s head office must remit sufficient funds for the operation of the branch. It must also appoint a litigious and non-litigious representative and a branch manager, who may be the same person and may be either Taiwan citizens or foreign nationals.
Representative office
Job-site office
The option of a representative office is available to foreign companies which do not intend to transact business in Taiwan but intend to conduct limited acts of a legal nature relating to their business. If a foreign company needs its representative to reside in Taiwan most of the time, it can apply to the MOEA to establish a representative office. A representative acts as the company’s legal agent for such matters as obtaining quotations, concluding purchase contracts and procuring goods.
A foreign enterprise intending to contract long-term construction work in Taiwan may find it preferable to set up a local job-site office. A job-site office need only apply for business registration, not corporate registration, and is allowed to make purchases and issue government uniform invoices (GUIs). However, it has the usual tax-withholding obligation and must pay business tax (i.e., value-added tax, or VAT) and income tax.
Summary tax information for different business entities in Taiwan (as of 1 January 2010) Subsidiary company
Branch
Representative office
Job-site office
GUI required?
Yes
Yes
N/A
Yes
Business tax (VAT)
5%
5%
N/A
5%
Income tax
20%
20%
N/A
20%
Dividend withholding tax
20%*
No withholding
N/A
No withholding
Profit retention surtax
10%
N/A
N/A
N/A
* 20% if no tax treaty protection is available—see Chapter 5 and 7 for more details on the above-mentioned taxes.
14 | Doing Business in Taiwan
Branch versus subsidiary In general, the taxable profits of branches and subsidiaries of foreign companies are computed in a similar fashion. However, whereas withholding taxes are levied on dividends distributed by Taiwan subsidiaries, there is no withholding tax on the remittance of after-tax profits by a Taiwan branch to its head office. The withholding tax levied on dividends paid to foreign shareholders is 20% if no applicable tax treaty exists.
Capital market investment In addition to the above forms of business, the Taiwan government permits foreign institutional investors (FINIs), overseas Chinese and foreign individual investors (FIDIs), and qualified domestic institutional investors (QDIIs) from China to directly invest in Taiwan’s stock market. The review process for investment by FINIs, FIDIs and QDIIs in local stocks is a registration system administered by the Taiwan Stock Exchange and supervised by the Financial Supervisory Commission.
General regulatory environment While laws have been strengthened in some areas, such as environmental protection, the government is committed to deregulation and the streamlining of procedures that make it easier to do business and invest in Taiwan. Investor considerations: • Free competition is encouraged; • Price controls are imposed only on basic necessities; • Government encourages mergers and acquisitions that serve the public interest; • Qualified foreign companies can obtain listings on Taiwan’s stock market by directly listing their shares or by issuing Taiwan depositary receipts; • Regulations allow foreign involvement in the financial services industry; and • Protection is given to foreign patents, trademarks and copyrights.
Business formation and the regulatory environment | 15
Competition and antitrust policy Free competition is encouraged under the rules of the Fair Trade Act, which governs monopolistic enterprises, mergers and acquisitions and any concerted action that may limit competition. Mergers and acquisitions The government encourages the merger or consolidation of two or more companies if this will improve their operations and efficiency. The Financial Institution Mergers Act and
16 | Doing Business in Taiwan
the Financial Holding Company Act govern consolidation among financial institutions. For companies in other industries, the Business Mergers and Acquisitions Act provides the legal framework and also certain benefits to encourage merger, acquisition and spinoff activities. Under the Fair Trade Act, a merger in which any of the following conditions hold must be submitted to the Fair Trade Commission (FTC) and may be approved only if it is deemed beneficial to the local economy: • Market share would be one-third or more of the whole market as a result of the merger;
• Market share of any of the businesses that is a party to the merger is a quarter or more of the whole market; and • Preceding year’s sales of any of the businesses that is a party to the merger exceed certain threshold amounts set by the FTC (NT$20 billion for financial businesses and NT$10 billion for non-financial businesses), and the preceding year’s sales of the other party exceed NT$1 billion. FIA companies should file an application with the MOEAIC if they wish to invest in or merge with another FIA or non-FIA company.
Concerted action Enterprises are prohibited from engaging in any concerted action with another unless: (a) It is beneficial to the economy and in the public interest; (b) An application to the FTC for such concerted action has been approved; and (c) It is one of a limited number of types listed in the Fair Trade Act, such as joint R&D, joint importation, etc. Multi-level sales Multi-level (pyramid) sales are prohibited where participants earn commissions, bonuses, or other economic benefits mainly from introducing others to participate, rather than from the marketing or sale of goods or services. Fair competition Pricing is to be determined through market mechanisms, and in principle interference with free competition is not allowed. Cross-border litigation Foreign corporations or organisations not duly recognised may file litigation under the Fair Trade Act on a reciprocal basis.
Merger and acquisition rules The main features of the laws governing merger and acquisition activities in Taiwan (principally the Company Law and Business Mergers and Acquisitions Act) are as follows: Simplified procedures Current rules allow for the relaxation of, and even exemption from, requirements for:
(c) Credit rights: with the approval of its creditors, a company may convert credit rights into equity; and (d) Spin-offs: current law also provides for the use of spinoffs as consideration for shares, although the originating company is jointly and severally liable for the spin-off’s obligations for two years. Tax incentives
(a) Creditor notice and approval procedures; (b) Quorum and voting requirements for shareholder approval; and (c) Shareholder approval for mergers of 90%-held affiliates and “whale-minnow� mergers.
A variety of tax incentives for mergers and acquisitions are available if the transaction meets certain criteria. These incentives include: (a) Exemption from deed tax, stamp tax, securities transaction tax and business tax, and deferral of land value increment tax; and
Flexible transaction devices Regarding share transactions, applicable laws allow a certain degree of flexibility. The options include: (a) Share exchanges: previously or newly issued shares may be used as consideration for shares acquired;
(b) Assumption by the surviving/ acquiring company of tax breaks and loss carry-overs to which the merged/acquired company was entitled. Applicability to foreign companies
(b) Share swaps: the shareholders of a company may vote to transfer and exchange all the outstanding shares of the company;
Foreign companies may make use of the merger, asset acquisition, share swap and spin-off devices, and the tax incentives, mentioned above.
Business formation and the regulatory environment | 17
Other applicable provisions Shareholder agreements, share transfer restrictions, voting trusts, and voting agreements are expressly permitted.
three-instance” paradigm, where the issues of fact and law are decided in the first and second instances and the Supreme Court only reviews issues of law.
Court system and arbitration
Administrative litigation
Litigation in Taiwan is conducted under a dual system divided into public law and private law. Civil, criminal and administrative cases are heard separately. The court system comprises ordinary courts, which hear civil and criminal cases, and administrative courts, and each court conducts the litigation process in accordance with its governing procedural codes.
The administrative courts consist of the Supreme Administrative Court and the High Administrative Court. Litigation is governed under the “two-level and two-instance” paradigm, where the High Administrative Court decides the issues of fact and the Supreme Administrative Court only reviews issues of law.
Civil and criminal litigation
Taiwan recognizes the validity of foreign civil judgments that meet certain criteria, and such foreign judgments may be duly enforced.
The ordinary courts consist of the Supreme Court, the High Court and its branch courts, and the District Court and its branch courts. Litigation is generally governed under the “three-level and
18 | Doing Business in Taiwan
Recognition and enforcement of foreign judgments
A final and binding judgment rendered by a foreign court is recognized,
except under any of the following circumstances: • Where the foreign court lacks jurisdiction under Taiwan law; • Where a default judgment is rendered against a defendant who fails to respond to a summons or appear in court, except where the notice or summons had been legally served in a reasonable time in the foreign country or had been served through judicial assistance provided under Taiwan law; • Where the performance ordered by such judgment or its litigation procedure is contrary to public policy or morals; or • Where there exists no mutual recognition between the foreign country and Taiwan. In addition, requests to enforce judgments rendered by foreign courts
must satisfy the following requirements:
Intellectual property rights
• Judgment rendered by the foreign court is a final and irrevocable judgment of payment; and
• Search and analyse the patent/ trademark being applied for;
IPR conditions in Taiwan
• Register the patent/trademark with the TIPO;
• Judgment is issued by a court in Taiwan granting enforcement of the foreign judgment. Arbitration Parties to a dispute may enter into an arbitration agreement designating a single arbitrator or a tribunal with an odd number of arbitrators to decide the dispute. In the absence of an appointment of an arbitrator or a method of appointment in an arbitration agreement, each party may appoint an arbitrator for itself. The appointed arbitrators then jointly designate a third arbitrator to be the chair. The arbitral tribunal is given six months in which to render a judgement. However, the arbitral tribunal may extend the decision period by an additional three months if necessary. The judgement is binding on the parties and has the same force as a final judgment of a court. An judgement may not be enforceable unless a competent court has granted an enforcement order.
In Taiwan, IPR regulations protect patents, trademarks, copyrights, industrial designs, trade secrets, indications of geographic origin, and integrated circuit layouts. Intellectual property rights granted outside Taiwan do not necessarily guarantee protection within the territory, and foreign inventors are strongly advised to seek broader protection through the MOEA’s Taiwan Intellectual Property Office (TIPO), which coordinates and administers Taiwan's IPR policies.
• Respond to official action, if any; • Pay applicable fees, if any; and • Pursue any necessary administrative remedies such as petition or appeal. For patents or trademarks already held, further maintenance is required: • Timely payment of renewal fees; • Monitoring of others’ IPR practices and market conditions;
In recent years, Taiwan has strengthened its IPR enforcement, enhanced its related laws, and demonstrated a commitment to becoming a haven for innovation and creativity. A specialised intellectual property court was launched in July 2008 to bring efficiency, quality and professionalism to IPR litigations; the court is effective to the same level as Taiwan’s High Court.
• IPR infringement assessment and litigation, if necessary; • Administrative remedies and dispute resolution, if needed; and • Other general affairs relating to, e.g., transferring IPR ownership and changing the name of the registered owner.
IPR procedures in practice Before rights can be granted, the applicant must do the following:
Business formation and the regulatory environment | 19
Labor-related health insurance, pensions and labor regulations
3 Chapter
20 | Doing Business in Taiwan
Worker protection policies in Taiwan, encompassing labor insurance, health insurance, pension and termination policies, are broadly similar to those found in many developed countries, if not quite as restrictive in some cases. This chapter covers the following: • Labor-related health insurance • Pensions • Labor regulations
Labor-related health insurance Labor insurance The Labor Insurance Act basically requires that, for companies with five or more employees, all employees must be insured under the government-run labor insurance programme. Companies with fewer than five employees may also apply for labor insurance coverage. There are two types of labor insurance: 1. Ordinary injury insurance, including maternity benefits for female workers and the wives of insured male workers,
injury and sickness benefits (other than medical expenses), medical care benefits, disability benefits, and old age and death benefits. 2. Occupational injury insurance, including work-related injury and sickness benefits, disability benefits and death benefits. Labor insurance is compulsory, with coverage extended to all local and foreign workers, including executive and administrative staff, except the “responsible persons” (typically the owners) of enterprises. In other words, those who are employed by, and receive wages from, an employer are entitled to coverage. Employers actually performing work may voluntarily join the labor insurance programme. National health insurance Taiwan’s National Health Insurance programme is designed to provide comprehensive medical services for the prevention and treatment of illness and injury, and for childbearing.
National health insurance is essentially compulsory and universal, with coverage given to all citizens who have resided in Taiwan for at least four months, and to foreign employees (together with their dependents) who do not have Taiwan citizenship but do have an Alien Residence Certificate.
Pensions Two pension schemes are currently in effect in Taiwan, with an older scheme under the Labor Standards Act (LSA) being phased out in favour of a new scheme, launched in July 2005, under the Labor Pension Act (LPA). Employees who began their employment with an enterprise after 1 July 2005 are all covered under the new pension scheme. The pension scheme under the LPA is a defined contribution plan where employers make monthly contributions to employees’ individual pension accounts. All domestic employees to whom the LSA was applicable are eligible for retirement benefits under the LPA. Employees may make voluntary
Labor-related health insurance, pensions and labor regulations | 21
contributions, up to 6% of their insured salary range, which may be deducted from their taxable income in the year concerned. For each employee under the new pension system, which includes all employees hired after 1 July 2005, the employer must make contributions of at least 6% of the employee’s monthly wages.
employer, and government:
The chart below summarises the monthly contributions for labor insurance, national health insurance and the new pension scheme borne by the employee,
Labor regulations
An employee who is 60 years old or older with more than 15 years of service is entitled to monthly pension payments. An employee with less than 15 years of service should take a lump-sum pension payment of the principal and accrued dividends in their pension account.
minimum wage, and must be paid at least twice a month except where otherwise agreed to by the parties in an oral agreement or labor contract, or where wages are paid in advance on a monthly basis. Employers are prohibited from docking wages as a disciplinary penalty or indemnity. Retirement
Wages and salaries Wages may not be less than the statutory
An employer can compel an employee to retire only if one of the following conditions holds:
Labor, health insurance and pension contributions (as of 1 January 2010) Contributions per month
Employee contribution
Employer contribution
Government contribution
Labor insurance
43,900*0.075*20%=
43,900*0.075*70%=
43,900*0.075*10%=
Wage up to NT$43,900
NT$571
NT$1,997
NT$285
National health insurance
131,700*0.0455*30%=
131,700*0.0455*60%*1.7=
131,700*0.0455*10%*1.7=
Wage up to NT$131,700
NT$1,798
NT$6,112
NT$1,019
Optional, up to 6%
At least 6%
150,000*6%=
150,000*6%=
NT$9,000
NT$9,000
Labor Pension Act scheme Wage up to NT$150,000
22 | Doing Business in Taiwan
N/A
1. The employee is age 65 or older. However, the employer may request the concerned authorities to lower the compulsory retirement age if the work performed by the employee is dangerous or physically demanding. The minimum retirement age allowed in such cases is 55. 2. Some mental or physical condition makes it impossible for the employee to undertake the work assigned. Special leave Employees are entitled to take leave with full pay for weddings (up to eight days), funerals, work-related medical care and/ or recovery, or legally required public service. Employers cannot reduce the eligibility of an employee for attendance bonuses (if any) simply because the employee has taken leave for those purposes. The following types of special leave are not granted at full pay: 1. Ordinary sickness and injury leave that does not exceed 30 days within one year must be paid at 50% of the ordinary wage. Leave for sickness or injury, other than from occupational accidents, is as follows: —— Sick leave excluding hospitalisation leave may not exceed 30 days within one year.
—— Hospitalisation leave may not exceed one year every two years. —— The total of hospitalised and nonhospitalised sick leave may not exceed one year every two years. 2. Female employees may request menstruation leave, incorporated into sickness leave, for one day per month. Days of menstruation leave are included in sick leave and the wage during menstruation leave is to be calculated in the same manner as sick leave. An employee may ask for normal leave to settle personal affairs. Normal leave without pay may not exceed 14 days within one year. Other types of leave • Maternity leave – eight weeks at full pay if employed for six months, at half pay if employed less than six months. Maternity leave of up to four weeks may be taken in the case of a miscarriage; • Paternity leave – three days at full pay; • Unpaid parental leave – after one year of service, an employee may apply for unpaid parental leave to care for children under three years of age; the duration of this leave cannot exceed two years; and
• Family leave – an employee working for an employer with five or more employees may request up to seven days of family leave per year, treated as normal leave, to care for a family member who is suffering serious illness or who must handle major events. Childcare facilities Employers with 250 or more employees are required to set up childcare facilities or provide access to childcare, and may apply to the competent authority for financial assistance after having done so. Hours worked Rules on working hours are provided under the LSA. The normal working hours for an employee are eight hours a day, up to 84 hours every two weeks. Employees are entitled to breaks of 30 minutes for every four hours of work. Children under 15 years of age are not allowed to work, while children between 15 and 16 years of age may work (with consent from legal guardians) up to eight hours a day. Employers are not allowed to have female employees work between ten o'clock in the evening and six o'clock the following morning except under certain conditions.
Labor-related health insurance, pensions and labor regulations | 23
Exceptions to the rules specified above are made, subject to the prior approval of the authorities, for supervisory/ managerial personnel and authorised specialists, and for monitoring or intermittent jobs. Paid holidays and vacations In addition to Sundays off, employees are entitled to time off on all national holidays. Employees are entitled to special annual leave on the following basis: Years of service 1 - <3 3 - <5 5 - <10 Over 10
Days annual leave 7 10 14 15-30*
* 14 plus one day for each service year over 10 years of service; maximum of 30 days per year.
Sexual discrimination In accordance with the LSA and the Gender Equality in Employment Act, employers are not allowed to practice sexual discrimination or sexual orientation discrimination against any applicant or employee in the course of recruitment, appointment, assignment, performance review or promotion. Employees doing the same work with equal efficiency should be paid on the same scale. Employers violating these
24 | Doing Business in Taiwan
provisions are subject to penalties. Employers with 30 or more employees must establish measures and guidelines for preventing and correcting sexual harassment, related complaint procedures, and punishment. These measures and guidelines must be openly displayed in the workplace. Health and safety Matters relating to labor health and safety inspections are provided in the Labor Safety and Health Act and other labor laws and rules. No business enterprise may refuse to allow an inspection undertaken by a labor inspection agency. Employers are required to provide necessary safety equipment and sanitation for the prevention of accidents caused by machinery, hazardous materials and so on. Machinery and equipment designated as dangerous by the government may not be used unless it is inspected and approved by an appropriate agency. Termination of employment An employer faced with any one of the following circumstances may terminate a labor contract by giving advance notice and paying severance pay: â&#x20AC;˘ Suspension or transfer of business
• Business operations suspended for more than one month due to force majeure;
of less than one year is to be calculated proportionately, and total severance pay is not to exceed six times the monthly average wage. Different conditions apply for employees under the old pension system. See the LPA and related laws for further details.
• Substantial change in business nature which requires a reduction of workers and the particular workers cannot be assigned to another suitable position; and
Under any one of the following circumstances the employer may terminate the employee’s labor contract immediately without giving advance notice or severance pay:
• A worker incapable of undertaking the assigned work.
1. Where an employee makes a false statement at the time of negotiation of a labor contract from which the employer suffers harm;
operations; • Operating loss or substantial contraction in business;
Under the above circumstances, an employer is required by the LSA to give a worker 10 days’ advance notice of dismissal if the worker has been employed more than three months but less than one year; twenty days’ notice if employed more than one year but less than three years; and 30 days’ notice if employed for more than three years. Also, under the above circumstances, an employer may terminate a labor contract immediately by paying wages for the period of advance notice. For employees who come under the new pension scheme, severance pay is calculated at half the monthly average wage for each year of service. Severance pay for a period of service
6. Where, without adequate reason, an employee is absent from the workplace for three days continuously or is absent six days within one month. In any of the above situations except for the third one, the employer must terminate the employee’s contract within 30 days after the employer becomes aware that the circumstance exists. For layoffs, different restrictions apply depending on the number of employees employed and the number of intended layoffs. The specific rules are given in the Protective Act for Mass Redundancy of Employees.
2. Where an employee violently abuses the employer, the employer’s family, or fellow workers; 3. Where an employee is sentenced to imprisonment by a final decision of a court; 4. Where an employee materially violates the labor contract or working rules; 5. Where an employee maliciously and intentionally damages any property of the employer, or where an employee intentionally divulges secrets relating to technology or business, causing the employer to suffer harm; or
Labor-related health insurance, pensions and labor regulations | 25
Audit requirements and accounting practices
4 Chapter
26 | Doing Business in Taiwan
Businesses are required to maintain accounting records and prepare annual financial statements in accordance with Taiwan Generally Accepted Accounting Principles (GAAP), which largely follow International Financial Reporting Standards (IFRS) and US GAAP. The Financial Supervisory Commission (FSC) announced in May 2009 that Taiwan would fully adopt IFRS starting from 2013 for listed companies and financial institutions. Taiwan requires financial statement audits for any company with paid-in capital exceeding NT$30 million. This chapter covers the following: • Accounting books and records • Audit requirements • Taiwan’s accounting profession • Auditor independence and auditing standards • Sample audit report • IFRS adoption in Taiwan
Accounting books and records Accounting period. Businesses generally use the 1 January to 31 December calendar year as their accounting year, which is the same as the fiscal year for tax purposes. However, a company may, with permission, adopt a non-calendar year-end. Bookkeeping currency. Accounting books must be denominated in the local currency (New Taiwan dollars, NT$). If accounts are kept in a foreign currency due to business needs, such currency must be translated into the local currency in the company’s closing financial statements. (Under IFRS, companies will be able to adopt a functional currency other than the NT$ in compiling their financial statements). Bookkeeping language. All accounting books, documents and financial statements prepared by a company should be in Chinese, but may also be written concurrently in a foreign language.
Accounting basis. Business entities must follow the accrual basis of accounting in performing recognition, measurement and reporting for accounting purposes. All income realised and expenses incurred or attributable to the current period should be recognised as income or expenses in the current period regardless of when the income is received or expenses are paid. Accounting books. Companies are required to maintain accounting records and prepare annual financial statements in accordance with Taiwan GAAP. They must keep journals, a general ledger and subsidary ledgers, as well as appropriate memorandum records. Computerised accounting systems, if utilised, can be regarded as the company’s accounting records. Financial statements. Basic financial statements such as balance sheet, income statement (profit and loss account), cash flow statement, statement of changes in owners’ equity and notes to financial statements, along with
Audit requirements and accounting practices | 27
comparative data for the previous year, are all required. Reporting format. The format of financial statements is set forth in the Statements of Financial Accounting Standards issued by Taiwanâ&#x20AC;&#x2122;s accounting standard-setting body, the Accounting Research and Development Foundation (ARDF). Public companies are also required to follow the format and guidance prescribed by the FSCâ&#x20AC;&#x2122;s Securities and Futures Bureau (SFB). Preservation of books and records. All accounting records must be kept for at least five years, and all accounting books and financial statements must be kept for
28 | Doing Business in Taiwan
at least ten years after the completion of annual closing procedures.
Audit requirements Private companies are required to have their annual financial statements audited and certified by a Taiwan-licenced certified public accountant (CPA) if their paid-in capital is NT$30 million or more. Public companies and financial institutions must also have their financial statements audited and certified by a CPA, as well as meet other reporting requirements. Public companies are required to have their annual financial statements audited
and certified by a CPA within four months following the close of each fiscal year. They must also have their semi-annual financial statements audited and certified by a CPA within two months after the close of each fiscal half year. In addition, their first and third quarter financial reports must be reviewed by a CPA within one month after the end of the first and third fiscal quarters.
Taiwanâ&#x20AC;&#x2122;s accounting profession The SFB is responsible for supervising public companies and the audit work of Taiwan-licensed CPAs, while the ARDF
is responsible for formulating guidelines on accounting principles and auditing standards. The major professional accounting bodies in Taiwan include the National Federation of Certified Public Accountants Associations, the Taipei City CPA Association, the Kaohsiung City CPA Association and the Taiwan Provincial CPA Association. In December 2007, the Certified Public Accountant Act was amended to make Taiwan’s practice environment more flexible and in line with international standards. The revised law provides CPA firms greater choice in organisation structure, clarifies firm liability, enhances CPA independence and strengthens the self-regulatory function of Taiwan’s CPA associations.
Auditor independence and auditing standards The Ministry of Economic Affairs and the FSC have issued “Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants,” which cover certain regulations on independence, reporting
and disclosure requirements, suggested audit procedures, and other general requirements related to the review of internal control systems. Auditor independence is at the heart of the integrity of the financial audit process. In Taiwan, an auditor is prohibited from becoming a director or officer in an audited company or having a direct or indirect financial interest in the company under audit. Audit firm rotation is not mandatory in Taiwan, but five-year audit partner rotation became mandatory for listed companies from 1 July 2009 in accordance with Taiwan’s Statement of Auditing Standards No. 46 “Quality Control for Public Accounting Firms.”
US Statements on Auditing Standards. The auditor’s report may conclude with an unqualified opinion, modified unqualified opinion, qualified opinion, adverse opinion, or a disclaimer of opinion. Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report together with a quantification of the possible effects on the financial statements.
Independent auditors attest to whether a company’s financial statements comply with accounting regulations and Taiwan GAAP. To do so, they must examine the financial statements in accordance with current auditing and certification rules, as well as the Statements of Auditing Standards issued by the ARDF. In general, auditing standards and procedures in Taiwan are similar to the International Standards on Auditing and
Audit requirements and accounting practices | 29
Sample audit report The following example shows the typical opinion language for an unqualified audit report on financial statements prepared and presented in accordance with Taiwan GAAP: “We have audited the accompanying balance sheets of ABC Company as of December 31, 20XX and 20XY, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.” “We conducted our audit in accordance with the ‘Regulations
30 | Doing Business in Taiwan
Governing Auditing and Certification of Financial Statements by Certified Public Accountants’ and generally accepted auditing standards in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.”
“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20XX and 20XY, and the results of its operations and its cash flows for the years then ended, in conformity with the ‘Rules Governing the Preparation of Financial Statements of Securities Issuers’, the Business Entity Accounting Law, the ‘Regulations on Business Entity Accounting Handling’ and generally accepted accounting principles in the Republic of China.”
IFRS adoption in Taiwan Financial statements prepared and presented in accordance with current accounting regulations and Taiwan GAAP differ in certain respects from IFRS. Although the majority of Taiwan’s Statements of Financial Accounting Standards are similar to IFRS, their actual application may differ. In May 2009, the FSC announced its roadmap for the full adoption of IFRS in Taiwan in two phases. • Phase I: Listed companies and financial institutions supervised by the FSC, except for credit cooperatives, credit card companies, and insurance intermediaries, will be required to adopt IFRS starting in 2013, with 2012 IFRS comparative data. Early adoption in 2012 is optional for companies that have already issued securities overseas, or have registered an overseas securities issuance with the FSC, or have a market capitalisation of more than NT$10 billion.
companies will have a two-year grace period and will not have to adopt IFRS reporting until 2015, with 2014 IFRS comparative data. Early adoption starting in 2013 is optional. Reporting requirements for private companies, including branches and subsidiaries of foreign companies, have not yet been decided. Several options are under discussion by the FSC’s IFRS adoption taskforce, including current GAAP, IFRS for SMEs and voluntary IFRS reporting. Companies transitioning to IFRS will face several challenges, including first-time adoption adjustments, stricter revenue recognition rules and new disclosure requirements. IFRS will also present unique challenges for the banking and insurance industries in view of the more stringent reporting requirements for recognition, measurement, presentation and disclosure of financial instruments.
• Phase II: Unlisted public companies, credit cooperatives and credit card
Audit requirements and accounting practices | 31
Business taxation
5 Chapter
32 | Doing Business in Taiwan
This chapter has been updated to reflect changes in Taiwan’s tax laws and regulations that occurred in 2009 as a result of the government’s tax reform programme. These include reductions in the corporate income tax rate and various other taxes; a new ruling on Taiwan-source income that should provide greater clarity for foreign companies doing business in Taiwan; and changes in the tax incentives available for qualified companies. This chapter covers the following: • Scope and rates • Taxable corporate income • Capital gains • Dividends • Withholding taxes • Alternative minimum tax • Tax administration • Tax incentives • Double taxation relief • Transfer pricing • Business combinations and reorganisations
Scope and rates Taiwan’s income tax system consists of individual income tax and profit-seeking enterprise income tax (corporate income tax). The term “profit-seeking enterprise” refers to any entity that engages in profitseeking activities, including companies, sole proprietorships, partnerships and other forms of business organizations. Any company operating within the territory of Taiwan must pay income tax, except where exemptions are provided. A company’s tax status determines how and at what rate the income tax is levied. The tax status of corporate taxpayers is divided into three categories: • A resident enterprise that has its head office located in Taiwan (including the locally incorporated subsidiaries of foreign companies)—subject to income tax on its worldwide income. • A non-resident foreign enterprise with its head office outside Taiwan but a permanent establishment (PE) in Taiwan (such as a branch office)— subject to income tax only on its Taiwan-source income. • A non-resident foreign enterprise with no PE in Taiwan—subject to withholding tax at source.
• Under Taiwan tax law, the PE concept refers to a fixed place of business or a business agent. In 2009, the Legislative Yuan amended the Income Tax Act to reduce the corporate income tax rate to 20% from 25%, and raise the minimum tax threshold to NT$120,000 from NT$50,000. The rate, which came into effect on 1 January 2010, was lowered to neutralise the adverse effects of the expiry on 31 December 2009 of the Statute for Upgrading Industries (SUI), which provided certain tax incentives to qualified companies, and to enhance the competitiveness of Taiwan’s tax and investment environment. Corporate income tax rates (as of 1 January 2010) Taxable income
Tax rate
Up to NT$120,000
0%
NT$120,000 and over
20%
In addition to normal tax calculations, Taiwan resident companies and foreign companies with a PE in Taiwan are subject to a separate alternative minimum tax calculation under the Income Basic Tax Act. This tax is described in more detail later in this chapter.
Business taxation | 33
Taxable corporate income Taxable income The taxable income of a profit-seeking enterprise is net income, which is defined as gross annual income after the deduction of costs, expenses, losses and taxes. Except for certain exempt items, income from all sources is subject to corporate income tax. Article 8 of the Income Tax Act and related guidelines define the types of income that should be regarded as Taiwan-sourced. To determine a company’s taxable income, its accounting income is adjusted by taking into account nontaxable income, non-deductible expenses and allowable provisions, and losses carried forward. Taiwan-source income On 3 September 2009, the Ministry of Finance (MOF) issued a tax ruling, the “Guideline for Determination of TaiwanSourced Income under Article 8 of the
34 | Doing Business in Taiwan
Taiwan Income Tax Act,” which clarifies the scope of Taiwan-source income, particularly with respect to service fee income. The ruling took effect on the date of issuance, and does not apply retroactively, in the tax authority’s current view, unless a case was still pending (such as one already under appeal. As a result of the new ruling, fees received by a foreign company for services performed entirely outside Taiwan are now exempt from income tax assessment, subject to supporting evidentiary documents. This opens up opportunities for foreign companies to reassess whether their cross-border service charges are wholly or partially non-Taiwan-source income, and to claim associated costs and expenses. Non-taxable income Corporate taxpayers in Taiwan are subject to a single assessment on all income received. Exceptions to this rule include the following income items, as detailed in the Income Tax Act and
related laws: • Proceeds from land sales; • Income from securities and futures transactions; • Dividends received by a Taiwan company from another local company; • Interest income arising from certain short-term instruments and securitisation certificates. • Royalties paid to a foreign company for the use of its patents, trademarks or technical know-how in order to introduce new production technology or products, improve product quality, or reduce production costs, subject to special approval by the competent authority; • Certain technical service fees received by foreign entities, subject to government approval; and • Business income obtained within Taiwan by a foreign company engaged in international
transportation, provided reciprocal treatment is granted to Taiwan transportation enterprises. Deductions In general, expenses or losses incurred in the normal course of business are tax deductible, except where these are not substantiated by adequate and acceptable documents. The main documentation requirements for tax deductions are as follows: â&#x20AC;˘ Overseas purchases: Required evidence includes commercial invoices from foreign suppliers, customs duty receipts, import declarations, remittance documentation and freight receipts; â&#x20AC;˘ Domestic purchases: Except for small-scale business enterprises and certain professional services practitioners whose monthly sales do not exceed NT$200,000, all profitseeking enterprises are required to use government unified invoices (GUIs). These invoices are the predominant form of documentation necessary to support deductions of local expenditures. For other deductible expenses supported by receipts from small-
scale business enterprises, the total claimed as deductions may not exceed 3% of total manufacturing and operating expenses. For payments made to professional practitioners, the required withholding tax must be applied to such payments, and receipts or remittance slips must be obtained accordingly. Non-deductible items Expenses and losses unrelated to the business operations of a company are not deductible. Unrealised expenses and losses may not be claimed as tax deductible items except in the case of allowances for inventory devaluation, provisions for employee pension reserves, employee retirement funds, labour pension reserves, allowances for doubtful accounts and provisions for foreign investment losses, as specified in the Income Tax Act and other related laws, or where specially approved by the MOF. In order to qualify for tax deductibility, provisions and allowances must be recorded on the books based on relevant laws; that is, these provisions cannot be made off the books for tax purposes only.
Business taxation | 35
Capital gains Taiwan does not impose a separate capital gains tax, as all gains, unless specifically exempt by law, are assessed as ordinary income and subject to income tax. Gains from the sale of land and securities and futures transactions are exempt from income tax, while losses therefrom are not tax deductible. Note, however, that Taiwan resident companies and foreign companies with a PE in Taiwan are required to include any gains arising from securities and futures transactions in their alternative minimum tax calculation in accordance with the provisions of the Income Basic Tax Act. Gains from land sales are subject to land value increment tax at rates ranging from 20% to 40%, while proceeds from securities and futures transactions are subject to securities transaction tax and futures transaction tax at rates of 0.1%-0.3% and 0.0000125%-0.6%, respectively.
Dividends Taiwan operates an imputation tax system to avoid double taxation of dividends by allowing shareholders to
36 | Doing Business in Taiwan
claim credits for taxes paid on dividends received at the corporate and individual levels. Treatment of dividends For Taiwan corporate shareholders, dividends received from local investee companies are not included in their taxable income. However, they must record any imputation tax credit distributed by other Taiwan companies along with the dividends in a shareholder-imputed credit account. Any dividends paid by such a corporate shareholder to its resident individual shareholders would, in turn, carry the underlying tax credit for corporate tax paid by its subsidiary. For resident individual shareholders, dividend income is not subject to withholding tax. The gross dividend received is included in an individualâ&#x20AC;&#x2122;s taxable income, and the associated imputation tax credit (for the underlying corporate tax paid by the company distributing the dividend) can be used to offset their individual income tax liability. Any excess credit is refundable to individual shareholders. For foreign shareholders, cash or share
dividends distributed by a resident company in Taiwan are subject to 20% withholding tax if no tax treaty protection is available. Undistributed earnings A 10% profit retention surtax may be imposed on any part of a resident companyâ&#x20AC;&#x2122;s current year profit (after taxes and statutory reserves) that is not distributed as dividends in the following year. This rule also applies to the Taiwan subsidiaries of foreign companies. The profit retention surtax paid by the company may be used by a resident individual shareholder to offset the shareholderâ&#x20AC;&#x2122;s tax liabilities once the company distributes dividends from the corresponding undistributed earnings in subsequent years. Please note that the credit for the profit retention surtax against the dividend withholding tax is not a dollar-to-dollar credit but calculated based on a prescribed formula. Non-resident shareholders may credit the 10% surtax against the dividend withholding tax once the company distributes dividends from the corresponding retained earnings in subsequent years.
Withholding taxes A foreign company with no PE in Taiwan is subject to withholding tax at source on its Taiwan-source income. Withholding tax rates on dividends, interest and royalties may be reduced if the recipient is a tax resident of a tax treaty country and the relevant treaty provides for a reduced rate. A Taiwan branch of a foreign company may remit after-tax profits to its head office without further Taiwan tax. Withholding taxes on wages, commissions, rentals, interest paid to non-financial institutions, royalties, cash awards and professional fees must be paid to the tax authority within ten days after the close of the month in which the payment was made. The withholders should prepare withholding certificates and submit them to the tax collection office for verification by the end of January of the following year.
Withholding taxes (as of 1 January 2010) Type of income
Resident individuals (%)
Resident enterprises (%)
Non-resident individuals and enterprises (%)
Dividends
N/A
N/A
20
(1)
20
Commissions
10
10
Rentals
10 (1)
20
Interest
10 10
10
15, 20 (2)
Royalties
10
10 (1)
0, 20 (3)
Technical service fees
10
N/A
3, 20 (4 & 5)
Prizes/Awards (6)
10, 20
10, 20
20
Professional fees
10
N/A
20
Notes: 1. Commissions, rentals and royalties received by resident enterprises that issue unified invoices are exempt from withholding tax. 2. For non-resident enterprises, a 15% withholding tax applies to interest income derived from short-term bills, securitized certificates, corporate bonds, government bonds or financial debentures, as well as interest derived from repurchase transactions involving these bonds or certificates. The rate in all other cases is 20%, unless reduced under a tax treaty. 3. Royalties received by foreign enterprises that are specially approved in advance by the government are exempt from income tax. 4. A 3% withholding tax rule may be applicable if approved by the tax authority. 5. Technical service fees received by foreign enterprises in relation to the construction of factories for manufacturing, and approved by the government are exempt from income tax. 6. For prizes or payment from contests and games won by chance, the withholding tax rate is 10% for resident individuals and enterprises and 20% for non-resident individuals and enterprises. However, cash awards less than NT$2,000 from lottery tickets issued by the government are not subject to withholding tax.
Business taxation | 37
According to MOF guidelines issued in September 2009, a foreign enterprise with no PE in Taiwan is subject to withholding tax if it receives Taiwansource income from service fees, rental income, business profits, awards/ grants and other income. However, the enterprise may appoint a tax agent in Taiwan to claim a tax deduction for costs and expenses incurred (supported by evidentiary documents), and it may apply for a tax refund within five years from the payment date.
• Government-owned enterprises;
Alternative minimum tax
• Income subject to AMT = Regular taxable income + add-back items
In addition to normal tax calculations under the Income Tax Act, Taiwan imposes a so-called alternative minimum tax (AMT) under the Income Basic Tax Act, effective from 1 January 2006. There are two AMT systems, one for companies and one for individuals (see Chapter 6). The AMT applies to all Taiwan resident companies, as well as foreign companies with a PE in Taiwan, if they earn certain income that is tax exempt or enjoy certain tax incentives, or if their annual basic income (that is, income subject to AMT) exceeds NT$2 million. The following are not subject to AMT: • Sole proprietors and partnerships; • Non-profit organisations;
38 | Doing Business in Taiwan
• Enterprises with no PE in Taiwan; and • Businesses in liquidation or declared insolvent. If the regular income tax amount is greater than the income amount subject to AMT (after adding back certain tax-exempt items), no special action is required. If the AMT taxable income is greater than the regular taxable income, taxpayers have to calculate and pay AMT based on the following formulae:
• AMT = (Income subject to AMT NT$2 million) x 10%
Tax administration The tax year in Taiwan runs from 1 January to December 31; companies must obtain prior approval to adopt a fiscal year other than the calendar year. Tax payments are filed on a selfassessment basis. All Taiwan resident companies, as well as foreign companies with a PE in Taiwan, must file annual returns with the tax authority no later than five months after the end of the tax year. Penalties are imposed for late filing and failure to file a return, and interest is charged on delayed payments.
finance companies, capital leasing companies, and companies engaged in securities and futures trading; • Public companies;
Tax returns Corporate tax payers must file returns using one of the following prescribed forms: • Ordinary return – used by all types of profit-seeking enterprises; • Blue return – used by enterprises with good filing records, subject to prior approval; or Group companies qualifying under the Business Mergers & Acquisitions Act, and financial holding companies as defined by the Financial Holding Company Act, can file a combined return for the parent and its first tier subsidiaries. Consolidated returns are not permitted for other enterprises. Consequently, the losses of one affiliate cannot be used to offset the profits of another.
As a general rule, losses incurred by a profit-seeking enterprise in an accounting year may not be carried forward. However, companies which keep a complete set of accounting books and records, use blue returns, or have their returns examined and certified by a certified public accountant (CPA), may carry losses forward for a period of up to 10 years. Losses cannot be carried back. Certification Submission of audited financial statements with tax returns is neither required nor customary. That said, certain enterprises must have their income tax returns examined and certified by a qualified CPA, including: • Banks, credit cooperatives, insurance companies, investment trust companies, short-term bill and
• Companies that have received approval for corporate income tax exemption in accordance with the Statute for Encouragement of Investment and other relevant laws, and have annual net sales and nonoperating income in excess of NT$50 million; • Companies that have filed a consolidated income tax return in accordance with the Business Mergers and Acquisitions Act or the Financial Holding Company Act; and • Companies other than those listed above whose annual net sales and non-operating income are in excess of NT$100 million. Other taxpayers may also opt to have their returns certified by a CPA, since this would enable them to enjoy the benefits enjoyed by companies filing a blue return, including the carry forward of prior year losses and a higher limit on claimable entertainment expenses. Payment Tax is paid on a self-assessment basis in two instalments. A company must
Business taxation | 39
pay provisional income tax equal to 50% of the tax liability declared for the previous year between 1 and 30 September. However, if the taxpayer meets certain requirements, it can opt to pay the provisional tax based on its taxable income for the first six months of the current tax year. The second payment is made when filing the annual return. The return is then reviewed by the tax authority and a final assessment is issued. Penalties are imposed for late filing and failure to file a return. The taxpayer is also required to pay interest on any unpaid taxes from the original due date to the date of payment. The interest charge is based on the prevailing oneyear time deposit interest rate set by the Directorate General of the Postal Remittances & Savings Bank each year. The charge may be waived if the amount is under NT$1,500.
40 | Doing Business in Taiwan
Assessments The tax authority is allowed to examine tax returns, accounting books and supporting documents. After a tax audit has been completed, the tax authority may request the taxpayer to explain any questionable items and present additional supporting documents. If the tax authority comes up with a different assessment, it will issue a formal assessment notice to the taxpayer, who then can opt to pay the tax as assessed or follow the appeal procedures provided under the relevant tax provisions.
Tax incentives Investment incentives for eligible direct investors are generally in the form of tax breaks aimed at encouraging them to step up their capital investment, R&D and human resource cultivation in Taiwan.
Certain tax incentives are provided to investors if they are located in prescribed areas such as science parks, economic processing zones, free trade zones and so on. Other tax credits are granted to qualifying companies that invest in specific businesses or industries being promoted by the government. Most tax breaks were previously offered under the SUI, which expired at the end of 2009 and will be replaced by a new Statute for Industrial Innovation (SII). Additional tax incentives are available under the Statute for Investment by Foreign Nationals/Overseas Chinese, the Business Mergers and Acquisitions Act, the Financial Institutions Merger Act and other laws and regulations. Notwithstanding the expiry of the SUI, companies can still apply for tax incentives under this statute if the requisite approvals had already been
obtained from the government before the expiry deadline. The Ministry of Economic Affairs has formulated a draft SII to take its place in 2010, which is expected to retain the existing tax incentives for R&D, the cultivation of talent, and the establishment of operational headquarters as well as international logistics and distribution centres in Taiwan.
• Income tax exemptions for foreign profit-seeking enterprises or branch offices setting up logistics centres in Taiwan or engaging a local logistics centre for the purpose of storage, elementary processing, and delivery of products of the foreign company to its customers located both onshore and offshore in support of industry supply chain development; and
The SII was still pending legislative approval as of the time of writing this guide. Although the contents of the statute have not been finalised and may be subject to change, it is expected to include:
• Income tax exemptions for income obtained from offshore affiliates of Taiwan-based operational headquarters, including management and R&D development fees, royalty income, investment income or capital gains on the disposal of offshore investments.
• Tax credits for R&D and personnel training, where the credited amount is proposed to be 35% of the amount invested in R&D and personnel training against the company’s income tax payable for the current year and the ensuing four years. Provided that the R&D and personnel training expenditure of the current year is greater than the respective average expenditure of the previous two years, then 50% of the excess amount may be credited against the company’s income tax payable for the current year;
In view of the proposed changes to Taiwan's tax incentive programme, we recommend that you contact PricewaterhouseCoopers Taiwan for the latest available information.
subject to income tax on their worldwide income, regardless of whether that income was derived inside or outside Taiwan. Taiwan uses the credit method (unilaterally) to avoid the double taxation of income. Foreign taxes paid on foreignsource income may be credited against a company’s total Taiwan income tax liability. However, the credit is limited to the amount of Taiwan income tax derived from foreign-source income. Double taxation agreements In addition to Taiwan’s domestic arrangements that provide relief from international double taxation, Taiwan has entered into bilateral double taxation treaties with 17 countries as of the end of 2009. These treaties generally follow the Organisation for Economic Co-operation and Development (OECD) model and their contents are summarised in the following table:
Double taxation relief Foreign tax credit Taiwan companies (including the Taiwan subsidiaries of foreign companies) are
Business taxation | 41
Withholding taxes under double taxation agreements (as of 1 January 2010) Country
Dividends (%)
Interest (%)
Royalties (%)
Australia
10, 15 (1)
10
12.5
Belgium
10
10
10
Denmark
10
10
10
Gambia
10
10
10
Indonesia
10
10
10 (2)
10
Israel
10
7, 10
Macedonia
10
10
10
Malaysia
12.5
10
10
Netherlands
10
10
10
New Zealand
15
10
10
Senegal
10
15
12.5
Nil
15
10
10
Singapore
(4) (5)
Other
South Africa
5, 15
Swaziland
10
10
10
Sweden
10
10
10
United Kingdom
10
10
10
Vietnam
15
10
15
(3)
Notes: 1. 10% for shareholders that are companies (other than partnerships) with at least a 25% shareholding. 2. 7% of the gross amount of the interest arising in a territory and paid on any loan of whatever kind granted by a bank of the other territory. 3. The withholding tax rate on technical service fee payments is reduced to 7.5%. 4. The total tax burden of corporate income tax and divided tax must not exceed 40% of the total profits of the company. 5. 5% for shareholders with at least a 10% shareholding.
42 | Doing Business in Taiwan
The government has proposed anti-treaty shopping rules that would introduce more stringent measures to verify whether applicants for tax treaty benefits are tax residents of treaty countries and bona fide beneficial owners of Taiwansource income. The rules are still under discussion and subject to changes until formally passed and announced.
transfer pricing rules include:
Transfer pricing methodology
• Transfer or use of tangible or intangible assets;
The following transfer pricing methods are acceptable for tangible asset transactions:
Transfer pricing
Related-party definitions
Taiwan has transfer pricing rules requiring that transactions between related parties be conducted on arm’s length terms. The "Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s Length Transfer Pricing” were issued in December 2004 and are in line with OECD transfer pricing guidelines. Arm’s length principle Transactions concerning revenue, costs, expenses and profit or loss allocations between an enterprise and another local and foreign enterprise that it has an association with, and those between one enterprise and another which it directly or indirectly owns or controls, must conform to the arm's length principle. The types of transactions covered by the
• Rendering of services; • Use of funds; and
• Comparable uncontrolled price method;
• Other types of transactions assessed by the MOF.
• Resale price method;
The transfer pricing assessment regulations provide specific definitions of related parties, and you are advised to consult the rules for details of the various defined relationships. In addition to a 20% equity ownership threshold, the MOF has adopted the “substantive management and control” and “material influence” concepts in defining what constitutes a related party relationship. Previously, the burden of proof in showing that a transaction is not conducted at arm’s length rested with the tax authority. Under the current rules, the burden of proof has been placed on the taxpayer, who is obligated to disclose information on related party transactions and prepare certain documents to comply with the relevant laws and regulations when filing their tax return.
• Comparable profit method; • Profit split method; and • Other methods approved by the MOF. The profit-level indicators prescribed by the transfer pricing assessment regulations include: • Return on operating assets; • Return on sales; • Berry ratio; and • Full cost mark-up. Documentation requirements For applicable companies, the disclosure of related party transactions in annual tax returns and the preparation of transfer pricing reports are required. They must prepare the following documents: • A comprehensive business overview;
Business taxation | 43
• A description of organization structure; • A summary of related party transactions; • A transfer pricing report; • A statement of affiliation (in the case of a subsidiary) and consolidated business report of affiliated enterprises (of a parent company), as stipulated in Article 369-12 of the Company Law; and • Other documents concerning related parties or controlled transactions that may affect pricing. The transfer pricing report should include the following items: • Industry and economic analysis; • Functional and risk analysis of all the participants in the controlled transactions; • A description of the nature of compliance with the arm’s length principle; • A description of the search for comparables; • Description of the selected transfer pricing method and the related comparability analysis; • Transfer pricing methods adopted by the other related participants; and
44 | Doing Business in Taiwan
• A description of the most appropriate method used to evaluate whether the result of the controlled transactions is at arm’s length and also its conclusion, including selected comparables, difference adjustments and their assumptions, arm’s length range, the conclusion of the evaluation, and the transfer pricing adjustment if the controlled transactions are not at arm’s length. In general, all required documents should be provided in Chinese, though English documentation may be acceptable if approved by the tax authority. Safe harbour rules The MOF established a safe harbour rule in December 2005 (revised in November 2008) to help alleviate taxpayer compliance costs. Companies which have controlled transactions below certain thresholds may replace their transfer pricing report with other evidentiary documents sufficient to prove that the results of such transactions are consistent with arm's length results. Penalties The tax authority can adjust the income of taxpayers whose controlled transactions fall outside acceptable ranges, and penalties may be imposed for failure to comply with the arm’s length principle.
Advance pricing agreements The transfer pricing rules also detail the procedures and documentation requirements for advance pricing agreements (APAs). A company meeting the following requirements may apply to negotiate with the tax authority for an APA: • The total amount of the transactions being applied for under the APA is at least NT$1 billion, or the annual amount of such transactions is at least NT$500 million;
years. Where an enterprise’s business nature has not materially changed, a one-time extension of up to five years can be requested. Other anti-tax avoidance rules The government has proposed the introduction of thin capitalisation rules and controlled foreign company provisions, which Taiwan currently does not have. The rules are still under discussion and subject to changes until formally passed and announced.
• No significant tax evasion has been reported in the past three years; and
Business combinations and reorganisations
• Documentation, such as business overview, relevant information on the related parties and controlled transactions, transfer pricing reports, etc., is provided within the prescribed time limit.
Merger and acquisition (M&A) activity in Taiwan has been on the rise in recent years, particularly in the financial services sector. The government provides various tax incentives to encourage domestic M&A, which offer significant tax savings for foreign investors wanting to acquire Taiwan companies.
Taxpayers deemed qualified to apply for an APA should file an application before the end of the first fiscal year to be covered by the APA. The tax authority will notify the taxpayer in writing within one month whether the application is accepted. Once the application is accepted, the taxpayer must provide all required documents and reports within one month from the date the notification is received. In general, an APA is valid for three to five
In general, when a merger, spin-off or acquisition involves the incorporation of a business, no taxes arise at the time of incorporation. Certain transfer taxes (such as business tax, securities transaction tax, stamp duty, deed tax and land value increment tax) may be exempted or deferred in a qualified merger, spin-off or acquisition transaction under the Business Mergers and Acquisitions Act.
Business taxation | 45
Asset acquisition Capital gains arising from the transfer of assets (except for land and marketable securities) are taxable at a corporate income tax rate of 20%. If the seller has tax losses carried forward, these may be offset against capital gains for corporate income tax purposes. An asset deal potentially allows the purchaser to step up the basis of the acquired assets for tax purposes. Such stepping up in value enables the buyer to reduce its future tax liability through a larger amount of depreciation of the tangible assets or amortization of the intangibles. In general, unused tax incentives may not be carried over by the acquiring company in an asset deal. In an asset deal, the seller is required to issue a GUI and charge VAT at the rate
46 | Doing Business in Taiwan
of 5% to the buyer for the sale of its operating assets, including inventories, fixed assets and intangibles. The buyer may either claim a VAT refund for certain assets or an input tax credit to offset output VAT. Share acquisition Gains from the sale of a target companyâ&#x20AC;&#x2122;s shares are exempt from income tax and losses suffered are not tax deductible, unless the seller is taxed on an alternative minimum tax basis. However, the sale is subject to a securities transaction tax of 0.3% on the proceeds from the share transfer. Interest expenses incurred by a Taiwan holding company in relation to the purchase of shares in a Taiwan target company may not be offset against dividend income paid by the target company.
After a share acquisition, the target company may continue to enjoy the unutilised tax losses carried forward and unused tax incentives that were enjoyed before the share acquisition. A share acquisition will not allow the buyer to step up the basis of the assets owned by the target company. The asset value would remain the same as it was before the share deal. Also, the target company may continue to depreciate its fixed assets on the same tax basis after the acquisition. Buyer vs. seller The buyer generally favours an asset purchase for several reasons: â&#x20AC;˘ It allows the purchaser to step up the basis of the acquired assets for tax purposes, which reduces the buyerâ&#x20AC;&#x2122;s future tax liability through larger depreciation charges;
• It may be possible to amortise goodwill over a minimum period of five years; and • Exposure to undisclosed liabilities or contingencies of the acquired company can be avoided. The seller generally favours a share sale for the following reasons: • Gains on the sale of shares of companies limited by shares are exempt from corporate income tax but may be subject to alternative minimum tax; • Share sales do not result in corporate and individual income tax liabilities on resulting dividends; and
will be considered investment dividend income to be taxed at the dissolving company's shareholder level. For individual shareholders who can provide proof of original investment costs, a shareholder can be assessed for the deemed dividend based on their actual investment costs, as opposed to the original paid-up capital of the dissolving company. Liquidations Gains from the liquidation of a business are included in the entity’s final tax return. Any gains from the distribution of the liquidation proceeds to shareholders are treated as dividends and taxed accordingly.
• Share sale procedures are much simpler. Mergers Goodwill arising from a business merger may be tax exempt on the part of the surviving company if it is arranged and qualified using the purchase method of accounting. If the consideration received from the merger exceeds the total paid-in capital of the dissolving company, the excess
Business taxation | 47
Personal taxation
6 Chapter
48 | Doing Business in Taiwan
This chapter has been updated to reflect the latest changes relating to the taxation of individuals in Taiwan. These include reductions in individual income tax rates; changes in exemption and deduction amounts; and the application of the alternative minimum tax to the overseas income of resident taxpayers (including expatriates), effective from 1 January 2010. This chapter covers the following: • Scope and rates • Filing obligations • Taxable personal income • Exemptions and deductions • Alternative minimum tax
Scope and rates Basis Individual income tax is levied on the Taiwan-source income of both resident and non-resident individuals, unless exempt under the provisions of the Income Tax Act and other laws. Income received for services rendered in Taiwan is considered to be Taiwansource income subject to tax regardless of whether such income is paid by a local
or an offshore employer. Starting from 1 January 2010, the alternative minimum tax, based on the Income Basic Tax Act, will apply to the overseas income of resident individuals, including qualifying expatriates. Residency An individual is considered resident in Taiwan for income tax purposes if: • Domiciled or ordinarily residing in Taiwan; or
Resident individuals are subject to progressive tax rates up to 40%. For taxable year 2010, the income tax rates have been reduced respectively to 5%, 12% and 20% from 6%, 13% and 21%, and the lowest tax threshold increased to NT$500,000 from NT$410,000. The progressive difference is subtracted from taxable income before applying the tax rate to determine income tax due. Individual income tax rates (as of 1 January 2010)
• Not domiciled but residing in Taiwan for 183 days or more in a taxable year.
Taxable income (NT$)
Tax rate
Progressive difference
0 – 500,000
5%
0
Foreigners who reside in Taiwan for less than 183 days are considered nonresidents, and in general, their Taiwansource income is subject to withholding tax at source.
500,001 – 1,130,000
12%
35,000
1,130,001 – 2,260,000
20%
125,400
2,260,001 – 4,230,000
30%
351,400
4,230,001 and over
40%
774,400
Personal income tax rates Taiwan uses a progressive tax rate system for individual income tax. Tax is charged on an individual’s gross assessable income less exempt income, personal exemptions, standard or itemised deductions, special deductions and other deductions permitted by law. Only a resident taxpayer is allowed to claim personal exemptions and deductions on their tax return.
Non-resident individuals who reside in Taiwan for less than 183 days are subject to withholding tax at a rate of 18% on wages and salaries, 20% on dividends, commissions, rental income, bank interest, royalties, professional fees, and prizes and awards obtained from contests or lotteries. From 1 January 2010, a 15% withholding tax applies to interest income derived from short-term bills, securitized certificates, corporate bonds, government bonds or financial debentures, and interest from
Personal taxation | 49
repurchase transactions involving these bonds or certificates. The rate in all other cases is 20%.
to file income tax returns, although tax is withheld by employers on any compensation paid in Taiwan.
For non-resident individuals staying in Taiwan for 90 days or less in a taxable year, there is no tax payable if their compensation is paid by an entity registered outside of Taiwan.
Payment of tax
Filing obligations
Taxable personal income
Returns Taiwan's tax year runs from 1 January to 31 December. Individual taxpayers are required to report all their Taiwan-source income, irrespective of the payment location of such income, and to file an annual return with the tax authority by 31 May of the following year, with no extensions allowed. For resident individuals, a consolidated personal income tax return must be filed with respect to Taiwan-source income. Married couples must file joint returns if both spouses have resided in Taiwan for more than 183 days in a taxable year. However, a spouse can opt to calculate taxes due on that spouseâ&#x20AC;&#x2122;s wages and salary separately. The income of any dependents for whom the taxpayer has claimed a personal exemption must also be included in the joint tax return. Non-residents who stay in Taiwan for 90 days or less in a year are not required
50 | Doing Business in Taiwan
Income tax is withheld on locally paid salaries. Any additional tax due must be paid at the time of filing.
Taxable income includes salaries or wages (and any allowances, bonuses or similar compensation); professional fees; rental income from property in Taiwan; and dividends, interest and royalties derived from sources in Taiwan. Awards and prizes are also subject to income tax. A foreigner who is present in Taiwan for more than 90 days is taxed on salary, bonuses and commissions earned for work done in Taiwan, regardless of where payment is made, but is not taxed on compensation for services performed outside Taiwan. Fringe benefits Expatriates working in Taiwan are also taxed on fringe benefits such as housing, living, education and transportation allowances. Fringe benefits to individual taxpayers in the form of cash allowances are all taxable regardless of the nature of the benefits. Fringe benefits provided
directly by the employer without cash payment to the employee are also taxed unless the recruitment of a foreign employee satisfies certain criteria for special tax incentives applied to foreign professionals.
income, and the associated imputation tax credit (for the tax paid by the company distributing the dividend) can be used to offset their income tax liability. Any excess credit is refundable to resident individuals.
As there are numerous tax interpretation rulings covering this subject, we recommend that you contact PricewaterhouseCoopers Taiwan for upto-date guidance.
For non-resident individuals, dividends received are subject to 20% withholding tax.
Capital gains Taiwan does not impose a separate capital gains tax, as all gains, unless specifically exempt by law, are assessed as ordinary income and subject to income tax. Gains from the sale of land and qualified securities transactions are currently exempt from income tax.
Exemptions and deductions Certain exemptions and deductions are available for a resident individual taxpayer, their spouse and dependents. A resident taxpayer may elect to claim either the standard deduction or itemised deductions, in addition to other special deductions. Non-resident individuals are not entitled to personal exemptions and deductions.
Note, however, that resident individuals must include any gains attributable to sales of unlisted shares in Taiwan in their alternative minimum tax calculation. Dividends Taiwan operates an imputation system to ensure that dividends received by individual shareholders are taxed only once, as part of personal income. For resident individuals, dividends received are not subject to withholding tax. The gross dividend received is included in an individualâ&#x20AC;&#x2122;s taxable
Personal taxation | 51
Exemptions (as of 1 January 2010) Exemption amount
Supporting documents
Taxpayer
NT$82,000
None
Spouse
NT$82,000
Copy of marriage certificate.
Dependents not over 20 years of age
NT$82,000
Copy of birth certificate.
Dependents over 20 years of age and studying in an approved college or university
NT$82,000
Dependents over 60 years of age
NT$82,000
1. Copy of birth certificate. 2. Copy of tuition receipt and valid student ID. 1. Copy of the birth certificate of the taxpayer / spouse. 2. Document certifying the parent is supported by the taxpayer / spouse. 1. Copy of the birth certificate of the taxpayer / spouse.
Dependents over 70 years of age
NT$123,000
2. Document certifying the parent is supported by the taxpayer / spouse. 3. Documents evidencing the parentâ&#x20AC;&#x2122;s living arrangements.
Standard deductions (as of 1 January 2010) Deduction amount
Supporting documents
Single taxpayer
NT$76,000
None
Married, filing jointly
NT$152,000
Copy of marriage certificate.
Note: A taxpayer can claim either the standard deduction or itemised deductions, depending on whichever gives a higher total deduction amount. There is no ceiling on the itemised deduction total.
52 | Doing Business in Taiwan
Itemised deductions (as of 1 January 2010) Deduction item
Maximum deduction
Supporting documents
Charitable donations
• Limited to donations to Taiwan-registered non-profit organisations and 20% of annual gross taxable income.
Original receipts.
Life insurance premiums
• Limited to NT$24,000 for each person per year.
Original receipts.
Medical and maternity expenses
No limit.
Original receipts issued by a qualified hospital or clinic.
Calamity losses
No limit.
Certificate issued by local tax office.
Limited to NT$300,000 for a tax filing unit.
• Interest payment receipt. • Title deed. • Documents evidencing the residence was owner occupied in the tax year.
Limited to NT$120,000 for a tax filing unit.
• Rental contract with the name of the taxpayer as lessee. • Rental payment receipt issued by the landlord. • Documents evidencing the residence was for self-use in the tax year.
Interest paid on loans for the purchase of an owner-occupied residence in Taiwan.*
Rental expense for the lease of a self-use residence in Taiwan.*
* Either "interest paid on loans" or "rental expense" is to be claimed.
Personal taxation | 53
Special deductions (as of 1 January 2010) Deduction item
Maximum deduction
Supporting documents
Salaries and wages
Limited to NT$104,000, or actual salary/ wages received, per person, whichever is lower.
None. • Certificate issued by local tax office.
Property transaction losses
Limited to property transaction gains for the same year. Any residual balance may be carried forward for three years.
• Purchase and sales contracts showing the purchase and sales price, and other relevant documentation detailing the related costs and expenses incurred.
Savings and investment
Limited to NT$270,000 per tax filing unit.
None.
Disability (mental or physical)
NT$104,000 per taxpayer, spouse and dependent, if handicapped.
Copy of a psychiatrist’s diagnosis certificate or copy of Disability Identification.
Dependent child tuition
NT$25,000 per dependent child if studying in an approved college or university.
Student certificate or tuition receipts issued by the dependent child’s college or university.
54 | Doing Business in Taiwan
Alternative minimum tax In addition to normal tax calculations under the Income Tax Act, Taiwan imposes a so-called alternative minimum tax (AMT) on individuals who are tax residents in Taiwan (including expatriates who stay in Taiwan for 183 days or more in a tax year). Effective from 1 January 2010, the overseas income of resident individuals will be included in the AMT calculation. Resident taxpayers with AMT taxable income of more than NT$6 million may be subject to AMT at the current rate of 20%. Under the Income Basic Tax Act, a taxpayer must calculate the amount of income subject to AMT after adding back certain items and compare the result with the regular income tax amount. If the AMT tax payable is greater than the regular income tax payable, the taxpayer has to calculate and pay AMT based on the following formulae:
unlisted securities, non-cash charitable contributions, the excess of market value over par value of stock dividends granted to employees, and foreign-source income totalling NT$1 million or more. Except for overseas income, the other items have been included in the AMT since 1 January 2006. Although the inclusion of foreign-source income will increase the AMT burden, any foreign taxes paid on such income may be credited against AMT payable, with certain limitations.
â&#x20AC;˘ Income subject to AMT = Regular taxable income + add-back items â&#x20AC;˘ AMT = (Income subject to AMT NT$6 million) x 20% The add-back items include qualified insurance benefits, capital gains from
Personal taxation | 55
Other taxes
7 Chapter
56 | Doing Business in Taiwan
This chapter overviews significant taxes other than corporate and personal income taxes, as follows below: • Value-added tax • Stamp tax • Customs duty • Commodity tax
Value-added tax All sales of goods and services in Taiwan, as well as the importation of goods into Taiwan, are subject to business tax, which is payable by sellers and service providers, unless the law provides otherwise. There are two types of business tax: value-added tax (VAT) and gross business receipts tax (GBRT). • VAT—applicable to general industries. The current rate is 5%, which is levied according to the value added to the goods or services up to the point of each sale. • GBRT—applicable to financial institutions, special vendors of beverages and food, and small businesses. Their sales, based on gross receipts, are subject to various business tax rates. For financial institutions, the GBRT rate ranges between 2% and 5%. Under the VAT system, each seller collects output tax from the buyer at the
time of sale, deducts input VAT paid on purchases from output and remits the balance to the tax authority. Where input VAT exceeds output VAT, the excess will be refunded or carried forward to be offset against future VAT liability. A credit or refund is not available under the nonVAT system. VAT at a rate of zero percent applies to the following transactions: • Export of goods; • Services provided in connection with exports, or services provided within Taiwan but used abroad; • Goods sold by duty-free shops; • Sales of machinery and equipment, materials, supplies, fuel and unfinished goods to enterprises located inside export processing zones and science-based industrial parks or to bonded factories and warehouses administered by the Taiwan customs authority; • International transportation, provided reciprocal customs duty treatment is granted by the home country of the international transportation company; • Vessels and aircraft used in international transportation and deepsea fishing boats; and • Sales of goods and maintenance services to vessels and aircraft used
for international transportation and deep-sea fishing. Some goods and services are exempt from VAT, as specified in the Business Tax Law, such as land sales and healthcare services. The key difference between the zero-rated treatment and exemption is that with the former one can credit or apply for a refund of the related input tax. A business entity must file a bi-monthly VAT return with the tax authority by the 15th of every odd month, even if no sales occurred in the preceding two months. Any VAT due should be paid prior to filing. The tax authority may issue a VAT assessment in the case of late filing or non-filing, and payment must be made within 10 days of receiving the assessment. The head office and other branches of the same enterprise located in Taiwan must file separate bi-monthly returns with the tax authority, as above. However, enterprises may apply for approval from the Ministry of Finance to file a consolidated VAT return.
Stamp tax Stamp duties are imposed on each copy of the following business transaction documents, property titles, permits, and certification executed within Taiwan: • Receipts for monetary payments:
Other taxes | 57
—— 0.4% of the receipt amount per piece, with a revenue stamp to be affixed by the issuer; —— 0.1% of the money deposited by the bidder per piece, with a revenue stamp to be affixed by the issuer; • Contracts or deeds for the purchase or sale of movable properties: NT$12 per piece with a revenue stamp to be affixed by the contractor or issuer of deed; • Contractual agreements for the completion of specific tasks: 0.1% of the contract value, with a revenue stamp to be affixed by the contractor or issuer of the deed; and • Contracts for the sale, transfer and partition of real estate: 0.1% of the contract price, with a revenue stamp to be affixed by the contractor or issuer of the deed. Stamp duty is payable upon the handover or use of the taxable documents / contracts after execution. The taxpayer is the party that executes the documents / contracts.
Customs duty Taiwan uses the Customs Cooperation
58 | Doing Business in Taiwan
Council Nomenclature (CCCN) to classify goods and set duty rates. The customs duty is payable by the consignee or the holder of the bill of lading for imported goods, and is based on the dutiable value or the volume of goods imported. Duty rate: Customs duty rates fall into three categories: 1. Most-favoured nation rate – for all World Trade Organization members and other countries with a reciprocal relationship with Taiwan; 2. Preferential rate – for specified underdeveloped or developing countries and those countries which have signed a free trade agreement with Taiwan (namely El Salvador, Guatemala, Honduras, Nicaragua and Panama) and other developing countries; and 3. General rate – applicable to jurisdictions other than the above. Exemptions: Certain goods are exempt from customs duty, commodity tax and business tax as specified in the Customs Law. Customs duty and VAT exemptions also apply to goods imported into free trade zones, science parks, export processing zones, bonded warehouses, bonded factories, logistics centres and duty free shops.
Declaration: The duty payer must declare imported goods to the customs authority within 15 days following the arrival date of the transportation means on which the goods were carried.
Commodity tax Commodity tax (excise duty) is levied on certain commodities, as specified in the Commodity Tax Act (including rubber tires, beverages, cement, flat-glass, oil and gas, electrical appliances and vehicles), at the time when such goods are dispatched from a factory or are imported. The payers of commodity tax are the manufacturers of taxable commodities produced locally, the manufacturers of taxable commodities manufactured on a consignment basis, or the holders of bills of lading, or holders of commodities in relation to taxable imported goods. For locally produced commodities the taxable value is the ex-factory selling price (as reported by the manufacturer) less the commodity tax included in the price. For imported commodities, the taxable value is the total amount of their customs value and applicable import tariffs. The following are exempt from
commodity tax: • Raw materials used for manufacturing other taxable commodities; • Export goods; • Goods for exhibition but not for sale; • Goods supplied for troop morale; and • Goods supplied directly for military use with the approval of the Ministry of National Defense. Local tax offices collect the commodity tax by the 15th of the month following the one in which goods are removed from the factory. Manufacturers must set up and keep account books, documents of evidence and accounting records for accurate calculation of the commodity tax. For imported taxable commodities, the importer shall file with the customs authority, which will collect the commodity tax together with customs duties. Different rates of commodity tax apply to different types of commodities based on the value or volume. The following table highlights the rates for taxable year 2010; except where noted, tax is applied on an ad valorem basis.
Commodity taxes (as of 1 January 2010) Type of commodity
%
Rubber tires (other than those for large buses and trucks) Rubber tires for large buses and trucks Non-alcoholic beverages (other than fruit and vegetable juices) Fruit and vegetable juices Cement Plate glass Oil and gas Refrigerators Electric ovens Television sets (colour) Air conditioners – controlled by centralized system Air conditioners – powered by electricity Dehumidifiers Videotape recorders Phonographs Tape recorders Audio equipment combination sets Cars with engines under 2000 c.c. Cars with engines above 2000 c.c. Motorcycles Trucks
15 10 15 8 (a)
10 (b)
13 15 13 15 20 15* 13 10** 10 10 25 30 17 15
Notes: (a) NT$280-600 per ton (b) NT$110–6,830 per m3 or NT$690 per ton depending on the oil or gas type.
* Dehumidifiers used in factories are exempt from commodity tax. ** Portable phonographs less than 32cm are exempt from commodity tax.
Other taxes | 59
Introduction to PricewaterhouseCoopers
8 Chapter
60 | Doing Business in Taiwan
Global PricewaterhouseCoopers (www. pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
Taiwan PricewaterhouseCoopers Taiwan (www. pwc.com/tw) is one of the leading professional services firms in Taiwan, employing over 2,000 people in eight offices island-wide. We provide a wide range of services to help organisations solve business issues, identify opportunities and maximise performance. Each line of service is staffed with highly qualified, experienced professionals and leaders
in our profession. These resources, combined with our strong global network of member firms, allow us to provide the support you need in Taiwan and the Greater China area.
• Consolidated financial statement services
We have extensive experience serving multinational companies and their affiliates, including representative offices, branches, joint ventures and other business entities, engaged in a wide range of activities in Taiwan and throughout the world.
• Mainland China services
Services offered
• Merger and acquisition services
Assurance services • Audit and assurance • IPO and securities listing services • Capital raising consultation • Global capital market advisory services • Sarbanes-Oxley compliance • Internal control consultation • Corporate governance consultation • Operational effectiveness consultation
• Financial restructuring services • Japanese client cervices
Tax and legal services • Domestic and international tax consultation and planning • China investment and tax consultation
• Global transfer pricing services • Financial services industry tax consultation • Tax services for FINIs (foreign institutional investors) • International assignment solutions • Company fiduciary and administration services • General accounting and related outsourcing services • Tax and business litigation services • Intellectual property, employment and dispute resolution services
Introduction to PricewaterhouseCoopers | 61
Financial advisory services • Corporate finance • Financial due diligence • Valuation and strategy • Business recovery services • Dispute analysis and investigations Performance improvement • Financial services industry: value and risk management services • Process assurance • IT effectiveness Global human resource solutions • Talent selection • Organization and human capital effectiveness • Compensation and benefits • Performance management and rewards • Talent management and professional development
62 | Doing Business in Taiwan
PricewaterhouseCoopers Taiwan offices Taipei 27F, International Trade Building 333 Keelung Road, Sec. 1 Taipei 11012, Taiwan Tel: 886-2-2729-6666 Fax: 886-2-2757-6371 / 6372
PricewaterhouseCoopers Legal, Hsinchu Branch E-1, 1 Li Shing 1st Road Hsinchu Science-Based Industrial Park Hsinchu 30078, Taiwan Tel: 886-3-500-7077 Fax: 886-3-577-3308
Chungli 22F-1, 400 Huanbei Road Chungli 32070, Taiwan Tel: 886-3-422-5000 Fax: 886-3-422-4599
Tainan
Kaohsiung 22F, 95 Minzu 2nd Road Kaohsiung 80048, Taiwan Tel: 886-7-237-3116 Fax: 886-7-236-5631
12F, 395 Linsen Road, Sec. 1 Tainan 70151, Taiwan Tel: 886-6-234-3111 Fax: 886-6-275-2598
Southern Taiwan Science Park Rm C, 2F-1, 17 Nanke 3rd Road Tainan 74147, Taiwan Tel: 886-6-234-3111 Fax: 886-6-505-0808
Hsinchu 5F, 2 Industry East 3 Road Hsinchu Science-Based Industrial Park Hsinchu 30076, Taiwan Tel: 886-3-578-0205 Fax: 886-3-577-7985
Taichung 31F, 345 Taichung Port Road, Sec. 1 Taichung 40309, Taiwan Tel: 886-4-2328-4868 Fax: 886-4-2328-4858
Taiwan contacts General enquiries Damian Gilhawley Tel: 886-2-2729-6666 ext. 23470 Email: damian.gilhawley@tw.pwc.com
Assurance services
Tax and legal services
Financial advisory services
Dexter Chang Tel: 886-2-2729-5222 Email: dexter.chang@tw.pwc.com
Steven Go Tel: 886-2-2729-5229 Email: steven.go@tw.pwc.com
Hui-Erh Yuan Tel: 886-2-2729-5210 Email: hui-erh.yuan@tw.pwc.com
Appendix: Key contact information | 63
Appendix Other useful contact information Taiwan is consistently ranked as one of the world's leading e-government nations, having developed a comprehensive e-government infrastructure which provides a wealth of information in English for organisations and individuals. The main entry portal can be found at http://english.www.gov.tw
Selected government listings Ministry of Economic Affairs (MOEA)
Investment Commission, MOEA
15 Fuzhou Street Taipei 10015, Taiwan 886-2-2321-2200 www.moea.gov.tw
8F, 7 Roosevelt Road, Sec. 1 Taipei 10092 Taiwan 886-2-3343-5700 www.moeaic.gov.tw
Department of Commerce, MOEA
Industrial Development Bureau, MOEA
15 Fuzhou Street Taipei 10015, Taiwan 886-2-2321-2200 http://gcis.nat.gov.tw Department of Investment Services, MOEA 8F, 71 Guanqian Road Taipei 10047, Taiwan 886-2-2389-2111 www.dois.moea.gov.tw
64 | Doing Business in Taiwan
41-3 Hsinyi Road, Sec. 3 Taipei 10675, Taiwan 886-2-2754-1255 www.moeaidb.gov.tw Bureau of Foreign Trade, MOEA 1 Hu Kou Street Taipei 10066, Taiwan 886-2-2351-0271 www.trade.gov.tw
Taiwan Intellectual Property Office, MOEA 3F, 185 Hsinhai Road, Sec. 2 Taipei 10637, Taiwan 886-2-2738-0007 www.tipo.gov.tw Financial Supervisory Commission, Executive Yuan 18F, 7 Xianmin Blvd., Sec. 2 Banciao 22041, Taiwan 886-2-8968-0899 www.fsc.gov.tw Ministry of Finance (MOF) 2 Aiguo West Road Taipei 10066, Taiwan 886-2-2322-8000 www.mof.gov.tw
Taxation Agency, MOF 2F, 2 Aiguo West Road Taipei 10066, Taiwan 886-2-2322-8000 www.dot.gov.tw
Department of Health (DOH), Executive Yuan 36 Tacheng Street Taipei 10341, Taiwan 886-2-8590-6666 www.doh.gov.tw
Bureau of Consular Affairs, MOFA 3-5F, 2-2 Jinan Road, Sec. 1 Taipei 10051, Taiwan 886-2-2343-2888 www.boca.gov.tw
Food and Drug Administration, DOH
National Immigration Agency, Ministry of the Interior
2 Zhonghua Road, Sec. 1 Taipei 10802 Taiwan 886-2-2311-3711 www.ntat.gov.tw
161-2 Kunyang Street Taipei 11561, Taiwan 886-2-2653-1318 www.fda.gov.tw
15 Guangjhou Street Taipei 10066, Taiwan 886-2-2388-9393 www.immigration.gov.tw
Kaohsiung National Tax Administration, MOF
Environmental Protection Administration, Executive Yuan
148 Guangjhou 1st Street Kaohsiung 80265, Taiwan 886-7-725-6600 www.ntak.gov.tw
1 Zhonghua Road, Sec. 1 Taipei 10042, Taiwan 886-2-2311-7722 www.epa.gov.tw
Directorate General of Customs, MOF
Council of Labor Affairs, Executive Yuan
13 Tacheng Street Taipei 10341, Taiwan 886-2-2550-5500 www.customs.gov.tw
9F, 83 Yanping North Road, Sec. 2 Taipei 10346, Taiwan 886-2-8590-2866 www.cla.gov.tw
Fair Trade Commission, Executive Yuan
Ministry of Foreign Affairs (MOFA)
Taipei National Tax Administration, MOF
12-14F, 2-2 Jinan Road, Sec. 1 Taipei 10051, Taiwan 886-2-2351-7588 www.ftc.gov.tw
Taiwan embassies and trade missions abroad A directory of Taiwan diplomatic and trade offices abroad is available at www.mofa.gov.tw
Foreign embassies and representative offices in Taiwan A directory of foreign diplomatic and representative offices in Taiwan is available at www.mofa.gov.tw
2 Kaitakelan Blvd. Taipei 10048, Taiwan 886-2-2348-2999 www.mofa.gov.tw
Appendix: Key contact information | 65
Foreign chambers of commerce in Taiwan American Chamber of Commerce in Taipei Suite 706, 7F, 129 Minsheng East Road, Sec. 3 Taipei 10596, Taiwan 886-2-2718-8226 www.amcham.com.tw Australian & New Zealand Chamber of Commerce in Taipei 5F, 44 Zhongshan North Road, Sec. 2, Taipei 104, Taiwan 886-2-7701-0818 www.anzcham.org.tw British Chamber of Commerce in Taipei Suite 805, 8F, 207 Dun Hua North Road Taipei 10595, Taiwan 886-2-2547-1199 www.bcctaipei.com European Chamber of Commerce Taipei 11F, 285 Zhongxiao East Road, Sec. 4, Taipei 10692, Taiwan 886-2-2740-0236 www.ecct.com.tw
66 | Doing Business in Taiwan
French Chamber of Commerce & Industry in Taiwan 2F, 307 Dun Hua North Road Taipei 105, Taiwan 886-2-2514-7959 www.ccift.org.tw German Trade Office Taipei 19F-9, 333 Keelung Road, Sec. 1 Taipei 11012, Taiwan 886-2-8758-5800 www.taiwan.ahk.de
Recycled Paper
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