When a foreign company provides services to clients in Taiwan, the payments made by the Taiwan clients are generally subject to a 20% withholding tax, which the Taiwan client deducts from the payment to the foreign company. In rare instances, the Taiwan client may choose to bear the withholding tax themselves, rather than deducting it from the payment to the foreign service provider. The foreign service provider can apply for a withholding tax reduction under the provisions of Article 25 of the Income Tax Act, potentially lowering the tax burden. Without a branch, the foreign company does not file Taiwan VAT on these services: a Taiwan business customer pays the 5% VAT on the fee itself under the reverse-charge rule (Article 36 of the VAT Act), and is exempt if it uses the service for its own taxable business. A foreign company selling electronic services to Taiwan individuals must register for VAT once its annual sales exceed NT$480,000. However, if the foreign company later establishes a branch in Taiwan, the tax obligations change significantly:
Value-Added Tax (VAT):
Obligation to File and Pay VAT: A foreign company with a Taiwan branch, is required to file VAT returns and remit VAT at a standard rate of 5% through its Taiwan branch.
Filing Deadline: VAT returns are filed every two months, by the 15th of the month following each two-month period (for example, by March 15 for January–February), whether or not the branch had any sales.
Example: Suppose Foreign Company A has established a Taiwan branch. The branch provides mechanical design and consultancy services to Taiwan Company B and issues a GUI to Company B. The branch reports the sale in the VAT return for that two-month period and pays the VAT by the 15th of the following month.
Company income tax
For foreign companies with a Taiwan branch, the income tax obligations differ:
- No Withholding tax by the Taiwan Client
Taiwan Client B is not required to withhold tax on payments made to Foreign Company A since the company operates through a branch in Taiwan.
- Branch Income Tax
Now, the Taiwan branch must include the service fee in its income tax return. Any applicable tax liability will then be paid as part of the branch’s corporate income tax obligations, which effectively represents the foreign company’s tax responsibility in Taiwan.
Other Tax Considerations for Branches
- Permanent Establishment (PE):
Setting up a branch in Taiwan creates a permanent establishment (PE), meaning the foreign company will be taxed on its local operations, including any revenue or profits earned through the Taiwan branch.
- Transfer Pricing:
If the branch transacts with its foreign head office or related entities, it must follow Taiwan’s transfer pricing regulations. This requires the branch to ensure that transactions between related parties (e.g., intercompany charges or service fees) are conducted at arm’s length and comply with Taiwan’s documentation requirements.
- Profit Repatriation:
A Taiwan branch can remit profits back to its foreign head office, but this is not considered a dividend payment, so it is not subject to Taiwan’s withholding tax on dividends. However, these profits must be taxed locally before repatriation.
Summary
While setting up a branch in Taiwan helps foreign companies avoid withholding tax on payments from Taiwan clients and offers operational advantages, it also introduces new tax obligations, including VAT registration, corporate income tax, and compliance with transfer pricing rules. Foreign companies must weigh these factors to ensure they meet their tax obligations under Taiwan’s regulations.
Ask our assistance
Discuss with us before signing the service contract with your Taiwan customers. We have extensive experience helping our clients to evaluate whether the withholding tax deduction application is applicable. Contact us for more information.