Taiwan’s Ministry of Finance (MOF) has published a statement clarifying the application of the country’s tax treaties on 26 September 2024.
Currently, Taiwan has 35 signed and effective comprehensive income tax agreements. The MOF will continue to actively promote and conclude such agreements with like-minded countries, in line with Taiwan’s trade, investment, and diplomacy interests, to create a fair, stable, and predictable tax environment.
The MOF explained that, according to the provisions of income tax agreements, taxing rights are allocated between contracting States. The principle rule is that the source State provides reasonable tax reductions or exemptions, while the resident State offers foreign tax credit or exemption. This mechanism helps individuals and enterprises engaging in cross-border economic and trade activities eliminate double taxation, thereby promoting bilateral trade and investment.
For example, when an enterprise of a State which has a tax agreement with Taiwan (hereinafter referred to as a partner State) derives business profits in Taiwan and does not constitute in Taiwan a “Permanent Establishment” (PE) defined by the applicable income tax agreement, it is eligible for tax exemption in Taiwan. Additionally, a resident of a partner State receiving dividends, interest, or royalties from Taiwan that meet specified requirements may benefit from reduced withholding tax rates. Moreover, remuneration derived by a resident of a partner State from employment exercised in Taiwan may be exempt if certain conditions in the agreement are met.
Since these income tax agreements are applied equally and reciprocally to residents of both States, Taiwanese residents engaging in similar businesses or activities in partner States may also benefit from the same favourable tax treatment in the partner States. Furthermore, if disputes arise regarding the application of the agreements between contracting States, taxpayers may request a mutual agreement procedure (MAP), which allows the competent authorities from both sides to communicate together and endeavour to resolve disputes, thereby preventing double taxation.
In support of the Net-Zero Emission goals, when an enterprise of a partner State sells overseas reduction credits it holds via the Taiwan Carbon Solution Exchange, and derives a Taiwan-sourced income, it may apply for tax reductions or exemptions under an applicable income tax agreement. In the case that the applicable tax agreement follows the OECD Model Tax Convention on Income and on Capital and the income from the alienation of carbon credits falls within the definition of capital gains under Article 13, the income will be taxable only in that partner State. In other words, the income will be exempt from tax in Taiwan. This helps prevent the double taxation on such income from occurring between Taiwan and the partner State.
Income tax agreements provide appropriate tax reduction or exemption measures and eliminate double taxation on income from cross-border activities, thereby making Taiwan a fairer, more stable, and more predictable tax environment, and enhancing Taiwan’s attractiveness to foreign investors. Under the principle of reciprocity, Taiwanese enterprises deriving income from trade or business activities in partner States may also benefit from tax reductions or exemptions in the partner States, so as to avoid double taxation burdens, increasing Taiwanese enterprises’ competitiveness and expanding their global reach. The MOF will continue to broaden its tax treaty network to foster trade and economic development.
