Expanding to Taiwan and associated legal and tax implications (Chungsun Prime CPA LLP)

Business Opportunities
October 5, 2021 - Chungsun Prime CPA LLP


This is a thought leadership article from PrimeGlobal member firm Chungsun Prime CPA LLP in Taiwan. The article examines the different forms of business organization in Taiwan available to foreign investors and the legal and tax implications.

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In virtue of its sound legal framework, highly skilled workforce, and favorable economic policies, Taiwan has become one of the most appealing countries to invest in. 

Taiwan’s economy was the 21st largest in the world in 2020 in terms of gross domestic product (GDP), and it is therefore an important market in regional and global trade and investment. It is also an island country, making it a platform linking to the world. Neighboring Taiwan to the west is the engine of global economic growth and the world's second-largest economy, Mainland China. To the north is the world's third-largest economy, Japan, and to the east is the world's largest economy, the United States. Furthermore, the distribution of industrial clusters in Taiwan can generally be broken down into electronics and technology in the north, precision machinery in central regions, and petrochemicals and heavy industry in the south. Taiwan not only also has a world-leading semiconductor industry, but also a first-class manufacturing and vigorous service industry. 


Business Entity Structures

The principal forms of business organization in Taiwan that a foreign company can utilize include subsidiary companies, branch offices, and representative offices.

Subsidiary Company

If a foreign investor is planning to incorporate a separate Taiwan legal entity through a subsidiary, there are four types of company it can choose from to conduct its business in Taiwan: unlimited company, unlimited company with limited liability shareholders, limited company, and corporation. A company limited by shares is the most common form of business in Taiwan, while unlimited company and unlimited company with limited liability shareholders are barely used in practice. The basic information of these four types is laid out below:

 

Unlimited Company

Unlimited Company with Limited Liability Shareholders

Limited Company

Corporation

Shareholder’s Liability

Unlimited

Unlimited liability for unlimited shareholders; limited liability to the amount of capital contribution

Limited to the amount of capital contribution

Limited to the amount equal to the total value of shares subscribed

Number of Shareholders

At least 2 shareholders

At least 1 unlimited shareholder and 1 limited shareholder

At least 1 shareholder

At least 2 shareholders; a single shareholder is accepted if it is a juristic person or government agency

Minimum Capital

No

No

No

No

Transfer of Shares

Unanimous consent of all other shareholders

Consent of a majority of unlimited shareholders

Consent of a majority of voting shares of other shareholders

Not necessary to obtain consent of shareholders

Distribution of profits

Based on the standards specified in the Articles of Incorporation

Based on the standards specified in the Articles of Incorporation

Based on the standards specified in the Articles of Incorporation

Based on shareholding ratio

Branch Office

A branch office may be set up in Taiwan to carry out business activities of the head office of a foreign corporation. While a branch has almost the same rights and obligations as a subsidiary, a branch is not a separate legal entity from the parent company but merely a direct extension of the parent company. There is no minimum requirement for the establishment of a branch office but its parent company shall appropriate funds exclusively for its operation of business therein before establishment. A branch office is not required to have shareholders, directors and supervisors, but the parent company shall designate a representative to serve as its responsible person in Taiwan. 

Representative Office

If a foreign company has no intention to carry out business in Taiwan but intend to establish a business presence in Taiwan for liaison purposes, according to Article 386 of Taiwan’s Company Act, it can appoint a representative for establishing a representative office to perform limited legal actions, such as concluding contracts, biding, procuring goods, quoting and bargaining. If a representative office engages in commercial activities, it may lead to legal compliance problems and imposition of taxes. There is no capital contribution requirement for representative offices. 


​Tax Implications

Generally speaking, since a representative office is not permitted to conduct commercial activities in Taiwan, most foreign investors operate their businesses in Taiwan through subsidiaries and branch offices. The main taxes that potentially apply to subsidiaries and branch offices are corporate income tax and business tax. 

Corporate Income Tax

Companies and branches operating business in Taiwan are subject to corporate income tax at a rate of 20% if the annual taxable income exceeds NTD$120,000. The taxation scope depends on the tax residence status, which is determined in accordance with the place of incorporation or the location of the head office. A company incorporated under the Company Act in Taiwan, such as a subsidiary of a foreign company, or with its head office in Taiwan is deemed as a resident for Taiwan tax purpose. A Taiwan resident company is taxed on its worldwide income. On the other hand, a company with its head office outside of Taiwan but having a fixed place of business in Taiwan or having a business agent in Taiwan, such as a branch of a foreign company, is considered a non-resident for tax purpose and taxed on its Taiwan-sourced income. 

When a subsidiary remits dividends to its foreign parent company, it is subject to a withholding tax of 21%, which may be reduced if tax treaties are applicable. In addition, if the company does not distribute its current after-tax profits to its shareholders in the following year, a surtax of 5% would be imposed on such undistributed earnings. As a branch office is deemed as an extension of the foreign parent company, its profits earned in Taiwan will be regarded as profits earned by the foreign company. Therefore, no withholding tax or surtax will be incurred for a branch office.

Taiwan also imposes an alternative minimum tax (AMT) on resident and non-resident entities with a fixed place of business or business agent in Taiwan under the Income Basic Tax Act. If the annual basic income, which is the sum of regular taxable income plus add-back items, surpasses NTD$500,000, taxpayers must pay the higher of regular income tax liability or the AMT payable. The add-back items include tax-exempt income under tax incentive schemes, tax-exempt capital gains from qualified securities and futures transactions, and tax-exempt income of offshore banking unit. The AMT payable is calculated based on a company’s annual basic income less a deduction of NTD$500,000, times the rate of 12%.

The assessed tax losses of a company can be carried forward for 10 consecutive years, provided the entity maintains sound accounting records, files a blue tax return, or has its tax return certified by a Taiwan-licensed CPA, and files it on time.  

The following table compares corporate income tax implications regarding different business entities:

 

Subsidiary Company

Branch Office

Representative Office

Tax Residency

Resident Company

Non-resident Company

N/A

Taxation Scope

Worldwide Income

Taiwan-sourced Income

N/A

Income Tax Rate

20%

20%

N/A

Surtax

5%

N/A

N/A

Profit Remittance Tax

21%

N/A

N/A

Alternative Minimum Tax

Applicable

Applicable

N/A

Tax Loss Carry-forward

Applicable

Applicable

N/A

Filing of Annual Tax Return

Required

Required

N/A

Tax Incentives under Statute for Industrial Innovation

Applicable

N/A

N/A

Dividend income from resident company

Tax-exempt

21%

N/A

Business Tax

Business tax, according to Taiwan Business Tax Act, is imposed on the sales of goods and services in Taiwan, as well as importation of goods into Taiwan. Except for entities subject to non-VAT, such as financial institution and other special business entities specified in Business Act, all business entities fall within the scope of the VAT system. The standard VAT rate is 5%. For export of goods and services related to exportation or services provided in Taiwan and utilized offshore, the tax rate is 0%. 


Our Insights

Pursuant to Article 42 of Income Tax Act, the dividends received by a profit-seeking enterprise organized as a company from its investment in another Taiwan profit-seeking enterprise shall not be included in its taxable income. Hence, it is advisable to utilize a subsidiary if the purpose of a foreign investor is to make further investment in other Taiwanese companies. Otherwise, establishing a branch is more favorable to foreign investors under other circumstances because a branch enjoys more tax benefits. 

Washington, July 21 (CNA) The U.S. government's Investment Climate Statements report released Wednesday, observes that Taiwan's advanced research and development (R&D) capability and government incentives have attracted American and other foreign investment in the country. Taiwan "is an important market in regional and global trade and investment" and has played "a dominant role" in the global technology supply chain because the export-dependent economy has a highly skilled workforce that contributes to R&D, the report said. 


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Chungsun Prime CPA LLP

Chungsun's professional team consists of experts with Taiwanese, Chinese and US CPA licenses. The team also has experience with IFRS, EAS and US GAAP. Chungsun Prime provides broad professional services, including M&A, global tax governance and compliance, legal consultation, family business legacy, international cross-border management, enterprise transformation and organizational evolution, corporate governance, sustainability and ESR. Chungsun Prime offers expert services in audit and assurance, tax compliance and consulting, bookkeeping, management advisory, administrative remedy and legal consultation.

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