Introduction to Individual Income Tax in Taiwan

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Introduction to Individual Income Tax in Taiwan

 

Individual Income Tax (IIT) in Taiwan, is a tax levied on an individual’s earnings and is only levied on Taiwan-sourced income. Aggregated income is the combination of all earnings of the taxpayer, net of various exemptions and deductions, and is taxed at a defined rate. Tax residence and non-tax residence had been introduced to different tax rates. Individual income taxpayers are divided into residents and non-residents. The resident is generally taxed at the progressive rate and the non-resident at a fixed rate applicable to the types of income generated.

 

  1. Tax Basis

 

Taiwan’s IIT is taxed based on the “territorial principle” and, with the following exceptions, is only levied on Taiwan-sourced individual income:

(1)     Taiwan citizens who have earnings from Mainland China (e.g. salaries from working in Mainland China) are subject to Taiwan income tax, but income tax paid in Mainland China is deductible.

(2)     The overseas income of Taiwan residents shall be calculated according to the Income Basic Tax.

 

  1. Taxation of Residents

 

A Taiwan tax resident falls under one of the two categories: –

(1)     A person who domicile in Taiwan and often reside within the territory. For example: Taiwanese.

(2)     A person who is not domicile in Taiwan but has lived in the territory for at least 183 days in a tax year. For example, foreigners who have been in Taiwan for a cumulative period of 183 days

 

Taiwan residents shall file their annual tax return and pay income tax from May 1 to May 31 of the following year. When the resident is in the process of filing tax returns, he or she shall file a consolidated return with the income of both his spouse and his dependents. The resident may deduct the exemptions and deductions from his/her taxable income while calculating taxable income.

 

(1)     Personal Exemptions

 

Since 2019, the taxpayer himself, his spouse and his dependent relatives will have an exemption of NT$88,000 per person (same as below). However, if the taxpayer himself, his spouse and dependent immediate family members have reached the age of 70, the allowance shall be increased by 50% to $132,000.

 

(2)     Deductions

Besides making itemized deductions and general deductions, as well as the special deductions, the list below presents the applicable deductions for the year of assessment 2019:

Deduction for Taxpayer for the Year of Assessment 2019
Item Deductible Amount (TWD)
General

Deduction

 

 General Personal Deduction Single NT$120,000 per person
Married filing jointly NT$240,000 per household
Itemized deduction Donations Except for donation to Ministry of National Defences; Contribution for troop-cheer; or any Other contribution to the Ministry, an amount does not exceed 20% of consolidated assessable income for the year shall be relieved.
Insurance Premiums Limited to NT$24,000 per person, does not include contribution to National Health Insurance (NHI).
Medical and Childbirth Expenses Verified and determined according to voucher.
Natural Disaster Damages Verified and determined according to voucher.
Interest on Housing Mortgage Up to NT$300,000 per household.
Housing Rental Up to NT$120,000 per non-business nature household.

(2)     General Deductions and Special Deductions—Cont’d

 

Deduction for taxpayer for the year of assessment 2019—Cont’d
Item Deductible Amount
Special Deductions Loss on Property Transaction Loss claimed shall not exceed the gain generated for the year.
Salaries and Wages Deduction NT$200,000 per person or the total of annual salaries and wages, whichever is lower.
Saving and Investment Deduction NT$270,000 per household, except for interest received from postal pass-book saving provisioned under Section 36 of Post Saving and Remittance Act.
Disable Deduction Any tax person who is defined as a patient under The Mental Health Act, may have a deduction of NT$ 200,000.
Education Deduction Up to NT$25,000 per dependent child of taxpayer, except for those who attends: –

(1)  National Open University (NOU)

(2) Vocational University

(3) The first 3 years of the 5 years Vocational University

(4) Those who accepted government education subsidies
Pre-school Children Deduction NT$ 120,000 per child (5 years old or under) per year (Note 2).
Long-term Care Deduction Up to NT$ 120,000 per year per person for any taxpayers who have elderly dependent who is mentally or physically incapable and requires long-term care defined by Ministry of Health and Welfare (Note 2).

 

Note 1: If the total deductible amount of itemized deductions is higher than the amount of general deduction, taking the itemized deduction is more beneficial for the taxpayer.

 

Note 2: Taxpayers who meets one of the following scenarios are not qualified for the deductions (after the pre-school children deduction and long-term care deduction are applied):

 

  1. The IIT rate applicable to the taxpayer’ taxable income is higher than 20%, or the IIT rate applicable to the taxpayer’s taxable income calculated either separately or jointly with his spouse, is higher than 20%. term care deduction) shall be charges at the 20% and above tax rate. (Same rule appliable to those who elected the flat 28% rate to calculate their dividend income and capital gains).
  2. If the basic income of the taxpayer calculated based on the rules of basic income’s calculation exceeds the applicable deduction applicable to the same rules for at least NT$ 6.7 million.

 

(3)     Progressive Tax Rate

 

IIT is a progressive tax system, the tax rate of Tax Year 2019 is as follows:

 

Progressive Tax Rate system for the year 2019
Net Taxable Income (NT$) Tax rate Progressive Difference (NT$)
0 ~ 540,000 5% 0
540,001 ~ 1,210,000 12% 37,800
1,210,001 ~ 2,420,000 20% 134,600
2,420,001 ~ 4,530,000 30% 376,600
4,530,001 and above 40% 829,600

 

  1. Non-Resident’s Taxation

 

Non- residents are those who have no residence in Taiwan and who have been in Taiwan for less than 183 days during the tax year. Non-residents fulfill their tax obligations by paying tax based on the source of their income. Tax withheld at source cannot enjoy any deductions or exemptions and is calculated on the gross earnings, generally at 20% depending on the income’s category. Therefore, if a non-resident has earnings that do not qualify any deduction, all earnings are taxed on the rates determined by law. Salaries are taxed at 18% of its payment amount if the monthly salary is lower than 1.5 times the monthly basic salary established by the Administrative Council, it is taxed at 6% based on the payment amount. Foreigners who are non-residents are taxed according to the number of days of their stay as follows:

 

(1)     No More Than 90 Days

 

During a taxable year, if a foreigner stayed in Taiwan for no more than 90 days, his/her salaries and wages received from employers outside of Taiwan will not be counted as Taiwan-source income. However, his/her salaries and wages received from employers in Taiwan are subject to a tax withheld at source at 18% or 6%. No tax return is required to file, and no deductions or exemptions are allowed.

 

(2)     More than 90 Days but Less than 183 Days

 

During a taxable year, if a foreign individual stayed in Taiwan for more than 90 days but less than 183 days, he/she is not a tax resident of Taiwan. Any Taiwan-sourced income, except for those that fall under the Double Taxation Agreement (DTA) and meet the criteria of the agreement, are regarded as taxable income and are taxed at source.

Salaries and wages received from an employer outside of Taiwan for services provided within Taiwan are considered as Taiwan-source income and are taxed at 18% or 6%, deductions and exemptions are disallowed. For salaries and wages paid by employers who reside within the borders of Taiwan, if the employers withheld 18% or 6% of taxable income, no tax filing is required.

 

  1. Income Basic Tax (IBT)

 

Taiwan tax residents can enjoy the deductions and exemptions under the Income Tax Act or other relevant acts. If the taxpayer’s basic income is over NT$6.7 million, then the Income Basic Tax shall be calculated according to the Income Tax Act. Starting 2019, the Income Basic Tax is calculated as follows:

 

Income Basic Tax = (Individual Income Tax + Overseas Income + Qualified Insurance Premium + interest from private investment funds + non-cash donations– NT$6.7 million) x 20%

 

If the calculated IBT exceeds the amount of tax payable net of investment tax credits, the taxpayer shall pay IBT based on the above calculation.

 

  1. Employee Stock Options

 

The Ministry of Finance has issued an interpretation order stating the tax requirements for employees’ stock options.

 

(1)     Stock Options from Corporations registered in Taiwan

 

For any stock options obtained from a company’s issuance under the Securities Exchange Acts or the provisions of the Company Law, and exercised according to company’s stock option agreement by employees, the difference between the fair market price on the day of exercise and the exercise price (the “grant” or “strike” price) is considered the employee’s Other Income. It shall be included in the tax year during which the stock options are exercised and is subject to income tax.

 

(2)     Stock Options from Foreign Corporations

 

For any stock options issued by foreign corporations to its employees working in Taiwan, and its employees in its Taiwan subsidiaries, branches, or representative offices, the difference between the fair market price on the day of exercise and the exercise price is considered the employee’s Other Income. It shall be included in the tax year during which the stock options are exercised and is subject to income tax, calculated as follows:

 

Other income

= (Market price of stock options on exercise day –Exercise price) x (Number of days residing in Taiwan from the granted date to the exercise date / Option exercise period)

 

The above calculation is only applicable to foreigners, Taiwan employee shall report the entire difference between the stock option’s market price at the time of the exercise and the grant price. If the employee did not render any service within the borders of Taiwan between the grant date and the exercise date, no Taiwan-sourced income is involved.

 

  1. Estate and Gift Taxes

 

A Taiwan resident who is considered to have a substantial presence in Taiwan is subject to estate and gift taxes on worldwide assets. Taiwan residents who usually reside outside of Taiwan, as well as non-residents, are subject to estate and gift taxes only on their estate and gifts transferred located in Taiwan. To have a substantial presence in Taiwan means owning a residence in Taiwan within two years preceding the decedent’s date of death or the date of gift transfer, or owning no residence but resided in Taiwan for at least 365 days during the 2 years prior to the date of death or the gift transaction.

 

(1)     Estate Tax

 

The payer of estate tax shall be the executor, heir and devisee, and administrator of the estate in sequence. Estate tax is calculated based on the market value of the property at the time of death, net of any exemptions or tax reliefs. An exemption of NT$ 12 million is available against the total value of assets, other tax reliefs are stated in Estate and Gift Tax Act. If the deceased has held investments in Taiwan in accordance with Statute for Investment by Overseas Chinese, any qualified property under this statute will be valued under Estate and Gift Tax Act and relieved half of the value as a non-taxable portion.

 

Currently, the formula to calculate the estate tax is as follows:

 

Estate Tax = (Value of property received – Non-taxable value – Qualified deductions) x 10% – Interest and other qualified deductions in accordance with Income Tax Act

 

(2)     Gift Tax

 

Generally speaking, the donor is subject to gift taxes. Gift tax is calculated based on the market value of the property at the time of transfer, net of any exemptions or tax reliefs. The annual exclusion amount is NT$2.2 million per donor. Properties donated to all levels of government, public education, cultural, public welfare and charitable institutions, public institutions, as well as all organizations that are registered and meet the regulations of education, culture, public welfare, charity, religious groups, are not included in the total gifts transferred and are not subject to the gift tax.

 

Gift Tax

= (Value of the property as at transaction date – Exemption – Qualified deduction) x 10%

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