The Central Taiwan tax authority has outlined crucial distinctions in tax treatment for businesses, confirming that liquidated damages for contract breaches require taxation and invoice issuance, whereas interest charged under the Civil Code for payment delays falls outside the business tax scope—a clarification that could significantly impact how companies structure their commercial agreements.
The Central Taiwan National Taxation Bureau has clarified, on 13 February 2026, that breach of contract penalties and late payment interest receive different tax treatments.
Penalties collected for contract breaches are subject to business tax and require uniform invoice issuance, while interest on delayed payments is tax-exempt and does not require invoices.
Under Article 16 of the Value-Added and Non-Value-Added Business Tax Act, liquidated damages paid for contract breaches are treated as sales consideration when connected to transactions. These amounts must be included in taxable sales revenue. The bureau emphasised that any compensation related to goods or services sold falls within the business tax scope.
According to the Ministry of Finance Order No. 11204662230 issued on 6 December 2023, late payment interest qualifies as liability for delay under Civil Code Article 233. Since this interest has no direct connection to the sale itself, it remains outside business tax requirements.
For example, when Company A sells TWD 1 million worth of equipment to Company B, a TWD 100,000 late payment penalty requires business tax and invoice issuance. However, TWD 10,000 in late payment interest is tax-exempt without invoice requirements.
The bureau warns against disguising sales prices as “interest” to evade taxes. Under the Taxpayer Rights Protection Act Article 7, Paragraph 3, authorities will apply substantive taxation principles to reclassify such arrangements as taxable revenue.
Businesses that failed to issue invoices for taxable penalties can proactively report and pay outstanding amounts plus interest under the Tax Collection Act Article 48-1 to avoid penalties before official investigation.
