The income tax exemption for royalties paid to foreign enterprises will be limited to the extent of their domestic use as per declaration of the Taiwan’s National Tax Administration (NTA).
The NTA confirmed that the domestic companies that, when using patent rights, trademarks or any kind of special licensed rights of foreign enterprises to introduce new production technology or products, improve product quality or reduce production costs in Taiwan, should conduct their such work within Taiwan, otherwise they will lose their income tax exemption rights.
This reminder from NTA follows a recent decision of the Supreme Administrative Court, which dismissed the claim from a foreign company that had signed a patent license agreement with a domestic company and then applied for a tax exemption. In this case the domestic company was considered to have transferred the licensed patent to its subsidiary in Mainland China for manufacturing. Given that the licensed patent was for foreign use and manufacturing instead of domestic licensee use, NTA rejected the application for tax exemption as it contradicts the reason for the tax exemption in promoting Taiwan’s economic development.
