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Pay service fees to foreign Companies /
Receive service fees from Taiwanese companies
When a Taiwan company pays service fees to a foreign company. The service fees are normally subject to a 20% withholding tax (WHT) as the service fees are considered Taiwan-source income. This means that your clients in Taiwan must deduct 20% tax from service fees and pay it to Taiwan's tax authorities. And only 80% of service fees are paid to your business.
However, if the services provided are technical services and most of the costs and expenses are incurred aboard, the foreign company may apply for approval to treat 15% of its total service fees as income derived in Taiwan, which is taxed at 20%, would effectively reduce the tax rate to 3%.
For example:
We are a US company providing technical services to my Taiwanese client. Most of the costs are not incurred in Taiwan. My Taiwanese client tells me it is the Taiwan-sourced income, and my company has to pay a 20% withholding tax. Is there any way to reduce withholding tax?
A: A foreign company with its head office outside Taiwan, and which is engaged in international transport, construction contracting, providing technical services, or machinery and equipment leasing, etc. in Taiwan., and the cost and expenses of which are difficult to calculate may apply for approval to consider 10% of its total business revenue, in the case of an enterprise engaged in international transport business, or 15% of its overall business revenue, in the case of an enterprise engaged in the other businesses, as its income derived within the territory of Taiwan. Regardless of it has a branch office or business agent in the territory of Taiwan.
Withholding tax deduction Application
Usually, the withholding tax rate is 20% for non-resident entities or individuals for the sum of payment.
However, with the approval of withholding tax deduction, the deemed profit rations differ as for the following table.
Ex:
A non-resident company provides technical services to its Taiwan customer; the total payment is $100,000.
Without the approval of the withholding tax deduction, the applicable tax is $200,000.
With the approval, the deem profits are $15,000 (profit ratio is 15% for technical services transactions).
The net withholding tax is $3,000 ($15,000 X 20% withholding tax rate)
The nature of the services
Not all the services rendered in Taiwan apply to such withholding tax deduction. The tax officer may reject the application if the nature of the business is receiving royalties, interests or authorization fees from a Taiwan company. In addition to the necessary documents, the tax officer may request other supporting documents. The most common application cases are technical services.
What Services are not considered Technical Services
1. Manpower dispatch services
Manpower dispatch services do not seem to provide technical services and are subject to withholding tax 20%. Whether it is a manpower dispatch service or technical service, the Taiwan Tax authority announces its comprehensive considerations:
1. The dispatched person is mainly subject to the command, supervision or performance appraisal of the Taiwan company.
2. A foreign company does not bear the liability for damages caused by the designated person.
3. The agreement is not clear about the content, objectives, and deliverables of the service.
4. The dispatched person must be approved by the Taiwan company.
5. The foreign company only plays the role of administrative affairs coordination in the consultancy process and does not provide technical assistance.
Ministry of Finance Tax Explanation No. 09504530470
2. Authorizing the use of patents, licenses, logos, marks, etc.
Ministry of Finance Tax Explanation No. 31481
3. Loyalties income
Ministry of Finance Tax Explanation No. 31481
Ministry of Finance Tax Explanation No. 32336
Ministry of Finance Tax Explanation No. 36533
Ministry of Finance Tax Explanation No. 38301
Ministry of Finance Tax Explanation No. 770006503
Other considerations
1. The foreign entity that applies withholding tax deduction must be a legal company. It cannot be a partnership. It must pay the tax in its registered country. A partnership cannot apply the tax deduction application because a partnership does not pay income tax directly to the tax authority. Instead, the partners are taxed on their shares of the income/loss of the partnership on their personal tax returns. Only the company formation is qualified for the withholding tax deduction.
2. All foreign companies can apply the application as long as the nature of the service fulfills the qualification even if the country where the company is registered does not sign the tax treaty with Taiwan.
3. extension of contract
If the foreign company has submitted the withhold tax deduction application in accordance with Article 25 of the Income Tax Act and obtains approval, and both parties agree to extend the term of the contract due to the expiration of the contract period. The foreign company is still required to submit the application for the extension.
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Discuss with us before signing the service contract with your Taiwan customers. We have extensive experience in helping our clients to evaluate whether the withholding tax deduction application is applicable. Contact us for more information.
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