VAT for foreign service providers with Taiwan branch

When a foreign company provides services to its Taiwan clients without a branch or fixed establishment in Taiwan, the payments made by the Taiwan clients are typically subject to withholding tax. The Taiwan client would withhold tax from the payment to the foreign company, and the withholding tax rate could range from 10% to 20%, depending on the type of service and whether a tax treaty applies.  However, if the foreign company establishes a branch in Taiwan, the tax situation changes:

VAT Issues

The foreign company with fixed business establishments in Taiwan (such as a Taiwan branch)and the foreign company providing services to Taiwan clients should file VAT through its Taiwan branch and pay 5% VAT(business tax) according to the Taiwan Tax Code.

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If the foreign company has a Taiwan branch, the foreign company should file VAT through its fixed business establishment registered (Taiwan branch) and pays VAT. The deadline for VAT filing is within 10 days after the service payment is settled.

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For example:

Foreign Company A has a Taiwan branch, and it provides technical services to Taiwan Company B, agreeing to provide mechanical design and consultancy services to Company B. The branch should file VAT and pay VAT within 10 days after Company B settles the payment.

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Company income tax issues

On the other hand, Company B (Taiwan client) is not required to withhold tax for Foreign Company A, but the Taiwan branch should include the service fee in the Branch's income tax return and pay the tax for the foreign head company.  

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Other Tax Considerations for Branches

1. 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.

2. 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.

3. 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.

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Ask our assistance

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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.