Taiwan: Supreme Administrative Court rules on withholding tax related to royalties
High-tech industries are an important part of the economy in Taiwan. Given the rapid changes associated with technological advancement, cutting-edge tech companies usually have higher incentives to engage in technology transfer across country lines in order to keep pace with the most innovative technology available. This partly explains why Taiwan has experienced a steady growth in the number of technology transfers.
In accordance with Taiwan's Tax Act, the income generated in Taiwan by a foreign company with no permanent establishment in Taiwan is taxable. In this respect, the royalty or remuneration received from others' use of an IP right, trade secret, or know-how is considered as assessable income subject to the withholding tax of 20%, unless otherwise specified, while the royalty payer serves as the tax withholder required to effect payment.
It is worth noting that the Supreme Administrative Court rendered in early 2020 a ruling which is able to shed some light on the tax-withholding issue.
In 2012, the legal representative of a Taiwan vacuum coating process equipment company received from tax authorities a payment certificate advising him to pay a short-paid duty, namely, a withholding tax of NT$50,210,089 ($1,674,954) (20% of NT$251,050,449, the royalty paid to a non-Taiwanese equipment supplier). Being dissatisfied with such determination, the representative filed a series of appeals in an attempt to indemnify against this tax liability. With a copy of a contract submitted as evidence, the appellant claimed that the equipment supplier should not be subject to any withholding tax since NT$251,050,449, included in the total amount of the transaction concerned, i.e. NT$380,938,780, was paid totally for purchasing machinery and equipment from the supplier and no royalty was ever paid or tendered.
However, even after the case was appealed to the highest court level, the Supreme Administrative Court affirmed the lower court's judgment that it is not improper for tax authorities to issue a payment certificate to collect the withholding tax of NT$50,210,089 for the following reasons: (1) NT$251,050,449 was enumerated in the appellant's financial statements and profit-seeking income tax returns of 2012 and 2013 as know-how/intangible asset and has been amortised since 2013; (2) the asset evaluation reports released by two financial advisory companies clearly set out that the total amount of the transaction concerned was NT$380,938,780 while the costs of the purchased fixed asset (equipment) and the intangible asset/know how were NT$129,888,331, and NT$251,050,44, respectively; (3) "technology transfer" was referred to in a section of the contract entered into between the two entities.
This case emphasised the need for a careful review of the contents of contracts. When it comes to a local company intending to purchase machinery or equipment from abroad, if no "technology transfer" is involved in the purchase process, such wordings as "technology transfer" or "royalty" should preferably not be referred to in any contracts, financial statements and the like.
Until now, Taiwan has signed reciprocal taxation agreements with 32 other countries. The withholding tax rate under these agreements may be less than 20% (see https://www.mof.gov.tw/Eng/singlehtml/191?cntId?63931 for details). In case a technical service offered by a foreign company in Taiwan is realised mainly through the engagement of local workers, a tax rate under 20% is available under Article 25 of the Income Tax Act. Moreover, while royalty or technology-based remuneration is deductible or exempt under specific conditions, as provided in Article 4.4.21 of the Income Tax Act, it should be borne in mind that tax deduction or exemption of this kind requires prior approval from the government.