According to Article 386 of the Companies Act, if a foreign company has no intention to carry out business activities in Taiwan, it can “apply for registration” with the Ministry of Economic Affairs and set up a representative office in Taiwan to perform “legal actions”. In Article 371, if a foreign company has the intention to carry on business activities in Taiwan, it has to set up a subsidiary or a branch office by completing company incorporation or branch office registration with the Ministry of Economic Affairs.
The Ministry of Economic Affairs issued an Interpretation stating that “legal actions” include “signing, bidding, purchasing, quoting and bargaining”(Ministry of Economic Affairs 921029, Interpretation No. 09202221350). Tax authorities also explain that 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 company income tax. Furthermore, the fund contribution to the representative office because of the sales prompt of the head office may be considered the sales of the representative office. Where there is no evidence of actual revenue and costs, income and revenue can be imputed to the representative office for value-added business tax and company income tax purposes on a “cost-plus” or “deemed profit” basis.
Tax authorities may consider several indicators below to decide whether the activity is profit-seeking activity:
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The industry of the head office and business model of the representative office.
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How long do the activities last and whether the activities are frequent and repetitive?
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The number of staff in the representative office and functions carried out by the representative office.
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Funds received from foreign head office and how they are used.
We suggest the company check whether the current operations in Taiwan are beyond the scope permitted by the representative office through the above indicators and choose to establish a proper entity to reduce tax risk.
Summary and FAQs
What are the limitations on the permitted activities of a representative office in Taiwan, and what are the potential tax risks if the office exceeds these limitations
Answer: The functions of a representative office in Taiwan are limited to “legal actions” such as signing, bidding, purchasing, quoting, and bargaining. It is not allowed to engage in business activities, such as marketing support or sales support. If the representative office engages in business activities, its income will be regarded as a service fee and subject to value-added business tax and income tax. The representative office may also face penalties for understated business tax and income tax if its contribution to the sales of the head office is considered sales of the representative office. Tax authorities may consider several indicators, such as the industry of the head office, the duration and frequency of activities, the number of staff, and the funds received from the head office to determine whether the representative office has exceeded its permitted scope of activities.
In terms of running a business, what are the differences between setting up a representative office and a subsidiary or a branch in Taiwan?
Answer: According to the Companies Act in Taiwan, a foreign company can set up a representative office in Taiwan to perform “legal actions” without the intention of carrying out business activities. However, if the foreign company intends to carry on business activities in Taiwan, it must set up a subsidiary or complete branch office registration with the Ministry of Economic Affairs. The requirements for setting up a subsidiary or a branch office. The subsidiary or a branch office must also register with the tax authorities for VAT issuance permit, and pay taxes in Taiwan. The scope of activities for a subsidiary or a branch office is broader than that of a representative office, and it can engage in profit-making activities such as sales and manufacturing.
Can a representative office issue invoices or collect payments from Taiwan customers?
Answer: No. A representative office is not registered for business tax, so it cannot issue Government Uniform Invoices, and it should not sign sales contracts or collect sales income in its own name. Its expenses should be funded by the head office. It obtains a tax ID from the National Taxation Bureau only as a withholding agent, so that it can withhold and report income tax on salaries and other payments it makes.
Reference:
- Ministry of Finance Tax Interpretation No. 7586964
Foreign companies that 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, only allowed to carry out procurement, an 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.
- 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 “files an application for the record” to the Ministry of Economic Affairs (it does not like the branch office, which is recognized by the Ministry of Economic Affairs) and cannot do business activities. In practice, it can only sign contracts, bidding, purchasing, quoting and bargaining. (Note: this 2003 interpretation was issued under the former recognition system. Since November 1, 2018, both branch offices and representative offices are registered with the Ministry of Economic Affairs.)
- Article 371 Companies Act
A foreign company without making branch office registration may not conduct its business operation in the name of a foreign company in the territory of the Republic of China.
A person who violates the provision set out in the preceding paragraph shall be punished with imprisonment for a period of not more than one year, detention, or in lieu thereof or in addition thereto a fine of not more than NT$150,000 and shall assume on his own the civil liabilities arising therefrom. In addition, the company shall be enjoined by the competent authority from using its foreign corporate name.
- 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 branch office registration, but designates a representative for establishing a representative’s office in the territory of the Republic of China, shall file a registration application with the competent authority.
If a foreign company has no intention to continuously set up the representative’s office after the establishment of such office, it shall apply for nullification of the registration with the competent authority.
If there is vacancy of the representative in the representative’s office or the office moves to an unknown place, the competent authority shall, ex officio, order the foreign company to designate a representative or change the location of the office within a certain time limit; if the foreign company still fails to do so after expiry of the deadline date, the competent authority may nullify the registration of the representative’s office.
(Current text as amended in 2018. The particulars and documents to be filed are now set out in the Regulations Governing Foreign Company Registration.)