Ministry of Finance clarified how businesses could calculate deductible foreign tax credits on income earned at home and abroad.
Taiwan’s Ministry of Finance released guidance on 14 October 2025 on properly calculating deductible foreign tax credits for businesses engaged in cross-border investments and transactions.
Under Article 3, Paragraph 2 of the Income Tax Act, businesses with their head office in Taiwan must consolidate and pay corporate income tax (CIT) on all income, both domestic and foreign. Taxes already paid abroad may be credited against the domestic tax liability, subject to certain limits. The credit cannot exceed the increase in domestic tax payable due to including foreign income.
The Kaohsiung National Tax Bureau clarified that when calculating the credit limit, the foreign income should be determined as foreign revenue minus related costs and expenses, rather than total foreign revenue. The creditable tax is capped at the smallest of the foreign tax paid, the maximum credit based on foreign income, or the domestic tax increase caused by including foreign income.
The calculation steps are:
The Bureau outlined the calculation steps as follows:
- Assume the foreign tax already paid is (A).
- Calculate the creditable limit:
- Foreign income = foreign revenue – related costs and expenses
- Foreign income × tax rate (corporate income tax rate 20%) = maximum creditable foreign tax (B)
- Calculate the increase in domestic tax payable due to including foreign income:
- Domestic tax on domestic income (C) = domestic income × tax rate
- Tax on total income (D) = (domestic income + foreign income) × tax rate
- (D) – (C) = increase in tax payable due to foreign income (E)
- The creditable foreign tax is the smallest of (A), (B), and (E).
Example: Company A received TWD 10,000,000 in foreign income during the 112th tax year. The foreign tax paid under the source country’s tax law that can be credited is TWD 2,000,000. The related costs of obtaining this income were NT$3,000,000, leaving a foreign income of TWD7,000,000 (10,000,000 – 3,000,000). The limit for the creditable foreign tax is TWD 1,400,000 (7,000,000 × 20%). Additionally, Company A reported a domestic loss of NT$2,000,000. After including the foreign income of NT$7,000,000, the increased domestic tax payable is TWD 1,000,000 [(–2,000,000 + 7,000,000) × 20%], which is less than both the foreign tax paid and the creditable limit. Therefore, Company A can credit TWD1,000,000 against its domestic tax liability for that year.
