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The business scopes of the representative office in Taiwan
-the permitted activities and potential tax risk
According to Article 386 in Companies Act, if a foreign company has no intention to carries out business activities in Taiwan, it can “file an application for the record” with the Ministry of Economic Affairs and set up the representative office in Taiwan to perform “legal actions”. In Article 371, if a foreign company has the intention to carries on business activities in Taiwan, it can set up a branch office after obtaining the “recognition” with the Ministry of Economic Affairs. The Ministry of Economic Affairs issued an Interpretation stating that “legal actions” include “signing, biding, purchasing, quoting and bargaining”(Ministry of Economic Affairs 921029, Interpretation No. 09202221350).
The functions of the representative office are limited to the defined “legal actions” and are not allowed to engage in business activities in Taiwan. Furthermore, Tax authorities consider that the non-business activities are limited to procurement, an inspection of goods, and contact windows (Ministry of Finance Tax Explanation No. 7586964).
Tax authorities have noted that the scope of activities of many representative offices has exceeded the level of procurement or contact windows and that they also provide different levels of support to their foreign companies, such as marketing support, sales support, and support for technical issues raised by customers. Tax authorities believe that these activities are beyond the scope permitted by the representative office and may lead to tax and legal compliance problems.
If the representative office is engaged in business activities, its income shall be regarded as a service fee and shall be subject to a value-added business tax and income tax. If there is no sales happened in the representative office, in some cases, the contribution of the representative office to the sales of the head office may be considered the sales of the representative office. If that happened, the representative of the representative office may be punished with a penalty of the understated of business tax and income tax.
Tax authorities may judge from the following indicators:
1. The industry of the head office and business model of the representative office.
2. How long do the activities last and Whether the activities are frequent and repetitive?
3. The number of staffs in the representative office and functions carried out by the representative office.
4. Funds received from foreign head office and how they are used.
We suggest the company check whether the current operations in Taiwan beyond the scope permitted by the representative office through the above indicators and choose to establish a proper entity to reduce tax risk.
1. Ministry of Finance Tax Interpretation No. 7586964
Foreign companies who have no business in the liaison offices within the territory of Taiwan are exempted from registration but should report to the regulatory agency.
The representative office established by a foreign company within the territory of Taiwan, if only carry out procurement, inspection of goods, and contact windows for its foreign head office, and has no external business, that is explained in accordance with the Ministry of Finance Tax Interpretation No. 7558643 of September 2, 1975, can be exempted from business registration and exempted from business tax and profit-making business income tax, but should file an application for record to the regulatory agency. The payment and receipt of the representative office should be accounted for according to regulations, and obtain receipts by the law or withholding rules. Those who have had non-operating income (such as interests) should still file income tax and pay income tax.
2. Ministry of Economic Affairs 921029, Interpretation No. 09202221350
Article 386 Companies Act is the legal source for the establishment of an office in Taiwan by a foreign investor. The formation of a representative office in Taiwan only " file an application for the record" to the Ministry of Economic Affairs (it does not like the branch office, which is recognized by Ministry of Economic Affairs) and cannot do business activities. In practice, it can only sign contracts, bidding, purchasing, quoting and bargaining.
3. Article 371 Companies Act
A foreign company may not apply for recognition without making incorporation registration in its own country and conducting its business operation therein. A foreign company may not transact business within the territory of the Republic of China without obtaining a certificate of recognition from the government of the Republic of China and completing the procedure for branch office registration.
4. Article 386 Companies Act
A foreign company which, having no intention to set up a branch office to transact business within the territory of the Republic of China, has not applied for recognition in the Republic of China, but designates a representative for the performance of juristic acts relating to its business in the territory of the Republic of China, shall file an application for record with the competent authority setting forth therein the following particulars:
(1)The name, class of company, nationality, and location of the company;
(2)Its authorized capital and the date of its incorporation;
(3) The business of the company and the juristic acts relating to its business to be done by its representative in the territory of the Republic of China; and
(4)The name, nationality and domicile or residence of its designated litigious and non-litigious representative in the territory of the Republic of China.
If the aforesaid representative shall, from time to time, be required to reside in the territory of the Republic of China, the company shall establish a representative's office and report its location in accordance with the aforesaid provisions.
The documents filed for recordation under the preceding two Paragraph shall be certified by the embassy/consulate, the representative office, business office of or any other institute authorized by the Ministry of Foreign Affairs and stationed at the locality where the competent authority of its own country or its representative conducts its/his business or legal acts or at the place where its representative's office is located.
A foreign company may not set up a representative's office within the territory of the Republic of China unless an application is filed for designation of the representative for record.