Proposed Amendment to Taiwan Tax Law against Tax Inversion

May 29, 2016

In light of the recent global efforts toward building an anti-tax inversion system, on April 28, 2016 Taiwan's executive branch of the government (i.e. the Executive Yuan) adopted a proposed amendment to Taiwan's Income Tax Act, which if passed by the Taiwan legislature will bring about an additional 7 billion NT dollars in tax revenue per year according to its preliminary estimates.  In the proposed amendment, controlled foreign corporations ("CFC's") or foreign corporations having a place of effective management ("PEM") onshore in Taiwan will be taxed as if they were domiciled in Taiwan and the payments they made would be considered Taiwan-sourced income and thus, subject to Taiwan income tax.  The Executive Yuan noted the evident global trend in fighting problems of the tax base erosion and the profit shifting by multi-national corporations.  To this end, in October of 2015 the Organization of Cooperation and Development (OECD) called for more effective rules to be implemented by nations to deal with such problems.  Consistent with such efforts, the Executive Yuan proposed this particular amendment to the Income Tax Act, to be considered by the Taiwan legislature for passage into law.  The important features of the proposed amendment are briefed as follows:


1.       In the case where a business owns 50% or more of a foreign corporation, or where it has a material influence in such an affiliate, the business shall recognize the earnings of such an affiliate as its investment income based on the percentage of its shareholding of such affiliate and the duration of its holding period for its shareholding in such affiliate, provided however that when such affiliate actually allocates and pays dividends, such payments shall be excluded to avoid being counted the second time. (amendment to Income Tax Act s. 43-3)

2.       A foreign corporation having a PEM in Taiwan shall be considered headquartered in Taiwan and shall be taxed as such in accordance with Taiwan's tax laws, and payments made by such foreign corporations shall be deemed sourced in Taiwan and be subject to withholding taxes at the source of payment when the payment is made.  All required remittances and withholding tax filings shall be complied with accordingly. (amendment to Income Tax Act s. 43-4)

3.       To avoid double taxation between the mainland China and Taiwan (and various other items of cooperation between the two as well as other considerations for the fairness in taxation and the acclimatization of new rules by the affected businesses in Taiwan), the Executive Yuan reserves the right to set the date of implementation (after the proposed amendment is passed by the legislature).