Common Mistakes of Foreign Company Applying Taiwan Income Tax Act Article 25
According to the profit margin stipulated in Taiwan Income Tax Act Article 25, simplifying the calculation of part of the contract costs is one of the services that many foreign companies often apply for when they run their business in Taiwan.
There are four types of applicable scope of business, including (1) operating international transportation, (2) contracting construction projects, (3) providing technical services, (4) leasing machinery and equipment, in Taiwan. If there are difficulties in dividing the cost of the above mentioned 4 types, with the approval from Taiwan Ministry of Finance, foreign company operating international transportation can calculate its income within Taiwan at 10%. For the other 3 types, income is calculated at 15%. So, the withheld income tax rate has been reduced from 20% to 3% (i.e. 20%*15% = 3%).
Taiwan National Taxation Bureau of the Northern Area receives approximately 300 related applications each year. However, due to more frequent cross-border transactions, the number of foreign applications has been increasing year by year, and it is not uncommon for application to be declined due to wrong information.
The first common mistake is that the applicant is not qualified. According to the review principles set by the Ministry of Finance, services provided by foreign-funded accountants, law firms etc., are not applicable to foreign profit margin. Legal persons, businesses, organizations or associations from Mainland China are not considered as foreign company, and they are not eligible to submit the applications as well.
The second type of error is the national of transaction. Although technical services lie within the scope, if it is an authorization of intangible assets such as various rights, secret methods, expertise, or customer information, then it is not a kind of technical service, and the relevant royalty contact cannot be counted. In addition, some foreign headquarters would provide management service on general administration or in the mode of manpower dispatch. These transactions shall not be recognized as technical services by the Taiwan Ministry of Finance, and the Taiwan National Taxation Bureau will exclude the items.
The third common mistake is the contact approved for applying a specific profit margin but did not re-submit for approval after change. A common situation is that the contract or approval period expired. If such contact is to be renewed or extended, it must submit a new application. Another situation is the change of contact content. If the scope of busines is greater than the one originally approved, then a new application is required.