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Profit-Seeking Enterprise Income Tax

A profit-seeking enterprise is defined as an entity established in the form of a sole proprietorship, partnership, company or other form of organization that operates for profit-seeking purposes through a fixed place of business, regardless of whether the enterprise is owned by the government, private sector, or jointly by the government and private sector. A profit-seeking enterprise is subject to profit-seeking-enterprise income tax.

Tax Base

A profit-seeking enterprise that has its head office in Taiwan (including a subsidiary that is wholly owned by a foreign company, or a joint venture company) is subject to profit-seeking-enterprise income tax on its worldwide income. A foreign tax credit is available for income tax paid in other countries on income derived outside Taiwan and can be utilized when the taxpayer presents the certificate of paid tax at the same year issued by the tax authority of the source income. The credit may be used to offset the foreign tax paid against the enterprise's Taiwan income tax liability, but the credit may not exceed the incremental tax liability that would result if the foreign-source income were added to the Taiwan taxable income and taxed at the applicable domestic rate.

A profit-seeking enterprise with its head office outside Taiwan (such as a branch of a foreign company) is considered non-resident for tax purposes, and is subject to profit-seeking-enterprise income tax only on its Taiwan-source income.

An enterprise organized as a corporation should adopt the accrual basis of accounting, while an enterprise organized in a form other than corporation may adopt the cash-basis method after obtaining approval from the tax authority. Where there are differences in the revenue, cost, expense and loss recognition based on tax laws and on accounting standards, the profit-seeking enterprise should make tax adjustments according to tax laws off the accounting books.

Exempt Income

According to Article 4, 4-1, 4-2 and 42 of the Income Tax act, the following categories of income are exempt from profit-seeking-enterprise income tax:

• Income derived from the sale of land (Since January 1, 2016, the income shall be taxed according to the Income Tax Act) or the sale of property for the purpose of stockpiling war materials in accordance with government regulations.
• Income on gains derived from securities transactions, applicable from January 1, 1990 (losses on securities transactions are not deductible).
• Income from futures transactions under the Futures Transaction Tax Act (tax on such transactions is temporarily suspended and losses incurred on such transactions are not deductible in computing taxable income).
• Business income derived from the operation in Taiwan of a foreign enterprise engaging in international transportation, provided reciprocal treatment is granted by the counterparty foreign country to a Taiwan international transport enterprise operating in its territory.
• Royalty paid to a foreign enterprise for the use of its patent rights, trademarks, and/or various kinds of special licensed rights in order to introduce new production technology or products, improve product quality, or reduce production cost under the approval of the competent authority as a special case.
• Remuneration paid to a foreign enterprise for technical services rendered for the construction of a production facility for an important manufacturing enterprise as determined and approved by the competent authority.
• Interest derived from loans granted to the Taiwan government or legal entities in Taiwan by a foreign government or international financial institution for economic development, and interest earned by foreign financial institutions from the financing of resources offered to their branch offices or other financial institutions in Taiwan.
• Interest derived from loans granted to legal entities in Taiwan by foreign financial institutions for financing important economic construction projects with the approval of the MOF.
• Interest derived from preferential-rate export loans offered to, or guaranteed for, legal entities in Taiwan by foreign government institutions and foreign financial institutions that specialize in offering export loans or guarantees.
• Net dividends or net surplus earnings received by a profit-seeking enterprise organized as a company from its investment in another domestic profit-seeking enterprise.

Deductible Expenses / Costs

Costs and expenses incurred by an enterprise for its main and auxiliary business operations may be deducted if sufficient supporting documentation is readily and sufficiently at hand. In other words, costs and expenses that do not satisfy these conditions may not be deducted in computing taxable income, nor may expenses that do not conform to the tax regulations. For example, where there is expense amount exceeding the limitation provided by tax laws, tax adjustments should be made and the exceeding amount should not be recognized as expenses for tax purposes.

Depreciation

Taiwan allows the following fixed asset depreciation methods: the straight-line method, declining balance method, sum-of-years' digit method, production volume method, working-hour method or other methods that are affirmed by the competent authority. Similar assets can be grouped and depreciated by the group total instead of by the cost of each item.

For income tax purposes, the service life of fixed assets for depreciation purposes must not be less than that prescribed in the Table of Service Life of Fixed Assets. However, for new equipment acquired to prevent water/air pollution, the service life can be shortened to 2 years.

Bad Debts

An allowance for doubtful accounts must be provided for accounts receivable and notes receivable. The allowance may not exceed 1% of the outstanding balance of total accounts and notes receivable. For financial institutions, the allowance may not exceed 1% of the outstanding balance of credit.

If projected bad debts qualified to be written off exceed the above limit, the taxpayer may set aside as an allowance the average of its actual bad debts incurred in the three preceding years.

Realized bad debt losses should be charged to the allowance for doubtful accounts in the year of realization. A bad debt in accounts receivable, notes receivable or other uncollectible credits may be considered realized in the following situations:

• The outstanding amount is wholly or partly uncollectible due to insolvency, disappearance of the responsible officer, composition (i.e. compromise settlement), bankruptcy or other cause.
• The outstanding amount has been past due for over two years, during which time neither the principal nor the interest accrued has been paid despite demands for payment.

Where debts are paid after bad debt provision is made, the paid amount should be recognized as income at the year of receipt of payment.

Tax Loss Carryforward

Losses incurred in prior years are not allowed to be calculated into current year's profits/losses. However, where a profit-seeking enterprise organized as a company (including a Taiwan branch office of a foreign company) keeps a complete set of accounting books and files a "Blue Return" (a tax form printed on blue paper and designed for encouraging profit-seeking enterprises to make honest reporting of their income) in the years the losses were incurred and in the years the losses were declared, or where the losses are duly certified by a certified public accountant and declared within the prescribed period, the tax losses may be carried over for ten years. The carryback of losses is not permitted.

Tax Rate

The minimum taxable income and tax rates for profit-seeking-enterprise income tax are as follows:

(Profit-seeking enterprises with a taxable income of not more than NT$500,000 are subject to annual adjustments with a tax rate of 18% for the year 2018, a tax rate of 19% for the year 2019 and a tax rate of 20% for the year 2020 and after, but income tax liability may not exceed 50% of the portion of taxable income over NT$120,000.)

Sample Calculation (for tax year 2018)

Income Tax on House and Land Transactions

Taxation on the income derived from house and land transactions, as implemented since January 1, 2016, is briefly introduced as follows:

Tax Scope

From 1st January, 2016, sales on house or land,

• Obtained after 1st January, 2016.
• Obtained after 1st January, 2014, and held less than two years.

Tax Base

• A profit-seeking enterprise with its head office in Taiwan
  • The balance of income derived from transaction of house and land of a profit-seeking enterprise for the current year after deducting the total amount of land value increment calculated in accordance with the Land Tax ACT shall be added to the amount of income of the profit-seeking enterprise. If the balance is a negative figure, the transaction income shall be counted as zero. The losses derived from transaction of house and land may be deducted from the income of the profit-seeking enterprise. However, the total amount of land value increment prescribed above shall not be permitted to make a deduction.
  • The income derived from transaction of house and land referred to in the preceding Paragraph indicates the amount that the total revenue deducts the costs, expenses, and losses, while the land value increment tax paid in accordance with the Land Tax Act shall not be deducted as expenses or losses.
• A profit-seeking enterprise with its head office outside Taiwan
  • For any profit-seeking enterprise having its head office outside Taiwan, its income derived from transaction of house and land within the territory of Taiwan shall calculate the tax payable in accordance with the following tax rates. If the enterprise has a fixed establishment within the territory of Taiwan, the tax payable shall be calculated separately from other income derived from sources in Taiwan, and such tax payable shall be included in the enterprise's income tax return filed by the establishment. If the enterprise has no fixed establishment within the territory of Taiwan, its business agent or an entrusted agent shall be responsible for filing of income tax return and paying the income tax:
  • The tax rate shall be 45% for the income derived from the transferred house and land held for a period of no more than 1 year.
  • The tax rate shall be 35% for the income derived from the transferred house and land held for a period of more than 1 year.
  • For any profit-seeking enterprise having its head office outside the territory of Taiwan who directly or indirectly owned more than a half of an offshore company shares that at least half of the value of such company constituted by house and land within the territory of Taiwan, its income derived from transaction of such offshore company shares shall calculate and pay the income tax in accordance with the preceding Paragraph.

Alternative Minimum Tax ( AMT )

AMT is a taxation system which requires companies that earn certain types of tax exempt income or that enjoy certain tax incentives to pay a minimum amount of tax. The purpose of AMT is to have those with the ability to pay tax make minimum contribution to the country, in order to maintain fairness of taxation and make sure of the revenue of the country.

As of January 1, 2006, the "Income Basic Tax Act" was effective and a profit-seeking enterprise with a fixed place of business or business agent in Taiwan has been subject to AMT. "Basic tax amount" is calculated by taking the exemption from the "basic income amount" and then multiplying the tax rate. A profit-seeking enterprise is not subjected to AMT if it does not enjoy tax incentives, or if it enjoys tax incentives but its regular tax payable is greater than the basic tax amount. Further, AMT is not applicable to profit-seeking enterprises qualifying Paragraph 1, Article 3 of the Income Basic Tax Act. AMT is calculated as follows:

Basic tax amount (Before or in 2012) = [Taxable income as prescribed in the Income Tax Act + add-back items as prescribed under Paragraph 1, Article 7 of the Income Basic Tax Act - NT$2,000,000] x 10%

Basic tax amount (After or in 2013) = [Taxable income as prescribed in the Income Tax Act + add-back items as prescribed under Paragraph 1, Article 7 of the Income Basic Tax Act - NT$500,000] x 12%

If the basic tax amount as calculated above exceeds the regular tax payable after deducting investment tax credits, the enterprise must pay the tax in difference. The difference which is payable should not be offset by the investment tax credit.

Tonnage Tax Regime

Beginning from the 2011 fiscal year, a profit-seeking enterprise which has its head office within the territory of the ROC and is engaged in marine transportation may apply to be taxed under the tonnage tax regime. Shipping companies that meet certain criteria will be able to choose to calculate the income derived from marine transportation on the basis of the amount of the net tonnage or on the basis of the amount of the actual ordinary income; once the choice is made, however, it will be binding for a period of 10 years. In case the profit-seeking enterprise fails to meet the above criteria within the aforementioned period, and the approval has been cancelled by the central competent authority, such enterprise will not be eligible to apply to calculate its income under the terms and conditions in the preceding provision for a period of 5 years commencing from the year in which it fails to fulfil the criteria necessary for qualification.

In line with the implementation of the tonnage tax regime, the MOF promulgated "The Regulations Governing Application for the Computation of Profit-Seeking Enterprise Income in Accordance with Article 24-4 of the Income Tax Act" on 4th August, 2011. The Regulations include detailed guidance for the qualification of shipping companies, qualifying ships, scope of shipping business revenues, application procedures, assessment procedures, and principles on the handling of disqualification cases.

Fiscal Year and Return Filing

Fiscal Year

Under the Income Tax Act, the fiscal year commences on January 1 and ends on December 31 of each calendar year. A profit-seeking enterprise may elect to adopt a special fiscal year at the time it is established and can request approval from the tax authorities to change its fiscal year.

Return Filing

A registered profit-seeking enterprise must file the provisional tax return and annual tax return with relevant documents. Moreover, a profit-seeking enterprise with its head office in Taiwan should also report its undistributed earnings earned in the previous year. The filing procedures are as follow:

• Provisional Tax Return
  • Unless otherwise exempt, a profit-seeking enterprise should pay the provisional tax and file the provisional tax return on a prescribed form along with the payment receipt in the ninth month of each fiscal year. The provisional tax is equivalent to one-half of the tax payable as shown in the previous year's annual tax return, and should be paid by the company voluntarily, and the company should file a provisional tax return with the receipt of payment to local tax collection office. However, where a profit-seeking enterprise did not utilize investment tax credit, administrative remedy tax credit or withholding tax credit to offset its provisional tax payable, such profit-seeking enterprise does not need to file the provisional tax return after making provisional tax payments.
  • A profit-seeking enterprise organized as a company (including a Taiwan branch of a foreign company) that keeps a complete set of account books under the tax rules, uses the Blue Return or entrusts a CPA to examine and certify its provisional tax return, and files the return within the prescribed period may alternatively compute the provisional tax payment based on the operating income derived in the first six months of the current year at current year's applicable tax rates and file the provisional return under the relevant regulations, and the method of calculation of provisional tax payable mentioned in the last paragraph (one-half of the tax payable as shown in the previous year's annual tax return) does not apply.
  • Profit-seeking entities that use special fiscal years may draw an analogy from the calendar year filing rules; namely, to file their provisional tax return in the 8th months after the first month of the special fiscal year (e.g. for a fiscal year beginning in April, the provisional tax return should be filed between December 1 and December 31).
  • Annual Tax Return and filing of retained earnings of previous tax year
  • An annual income tax return must be filed between May 1 and May 31 reporting the income and income tax payable of the preceding tax (calendar) year. A profit-seeking enterprise with its head office located inside Taiwan should also report its undistributed earnings from the previous tax year and pay the 10% retained earning tax and a 5% rate for the year 2018 and after.
  • A profit-seeking enterprise with a special fiscal year must file the return on or before the last day of the fifth month after the end of the fiscal year (for example, for company adopting tax year from August 1 to July 31, the filing period would be December 1 to December 31).
  • The annual tax return should cover an enterprise's operating revenue, costs, gross margin, expenses, net profits and non-operating income or losses. An enterprise must attach to the annual tax return its balance sheet, statement of changes in the imputed tax credit account and the return of undistributed earnings.

Transfer Pricing

Following the trend of many countries worldwide, Taiwan has introduced its own transfer pricing rules to govern related party transactions. The basis and main features of Taiwan's transfer pricing regime are consistent with the rules in other countries, as well as the OECD Model.

Transfer Pricing Regulation

Article 43-1 of the Income Tax Act allows the tax office, with the approval of the MOF, based on arm's length transaction price, to make an adjustment to the revenue, costs, income or expenses of enterprises engaging in related party transactions which result in tax avoidance or reduction in tax liability. The MOF promulgated Regulations Governing the Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's Length Transactions ("TP Assessment Rules") on 28 December 2004 and amended some of the aforementioned regulations on 6 March 2015 and 13 November 2017 which provide that transfer pricing documentation, investigation, and assessment of related party transactions should be done according to the said Rules.

Definition of Related Parties

The TP Assessment Rules include a specific definition of related parties, as well as examples of what constitutes a related party:

• 20% Subsidiary - When a profit-seeking enterprise directly or indirectly owns 20% or more of another profit-seeking enterprise's outstanding voting stock or capital.
• 20% Common Ownership - When 20% or more of the outstanding voting stock or capital of two or more profit-seeking enterprises is owned or controlled directly or indirectly by the same shareholder.
• 10% Major Shareholder - When a profit-seeking enterprise owns at least 10% another profit-seeking enterprise's outstanding voting stock or capital and at the same time has the highest percentage of shareholding in that profit-seeking enterprise.
• Common Directors - When two profit-seeking enterprises have the majority (50% or more) of their executive shareholders or directors in common.
• Control over Board of Directors - When the majority (i.e., more than 50% ) of the directors of a profit-seeking enterprise are appointed by another profit-seeking enterprise or its 50%-owned subsidiaries.
• Common Chairperson or President - When the chairperson, CEO or person of equivalent or higher position of a profit-seeking enterprise is identical to that of another profit-seeking enterprise, or is the spouse or relative within two levels (e.g. parent, grandparent, child, grandchild, brother or sister) of that of another profit-seeking enterprise.
• Branch Offices - Foreign headquarter or a foreign branch and its Taiwan branch; Taiwan headquarter or a Taiwan branch and its foreign branch.
• Control over Personnel, Finance or Operation - When the personnel, finance or operation of a profit-seeking enterprise is directly or indirectly controlled by another profit-seeking enterprise, including where:
  • A profit-seeking enterprise appoints its employee to be the CEO or person of equivalent or higher position of another profit-seeking enterprise.
  • A profit-seeking enterprise other than financial institution lends capital to or guarantees the loan of another profit-seeking enterprise with an amount greater than one-third of the total assets of that other enterprise.
  • A profit-seeking enterprise provides patent, trademark, copyright, intellectual property right, secret formula, technical know-how or franchise to another profit-seeking enterprise, where the intangible property is crucial to the production or operation of another profit-seeking enterprise and the gross value of the production or operation involved constitutes 50% or more of that other profit-seeking enterprise's total gross value of the same tax year.
  • A profit-seeking enterprise purchases raw materials or products, of which the prices and terms/conditions are controlled by another profit-seeking enterprise, and such purchase amounts to 50% or more of buyer enterprise's total raw material or product purchase value of the same tax year.
  • The product sales of a profit-seeking enterprise are controlled by another profit-seeking enterprise, and such sales amount to 50% or more of the seller enterprise's total sales of the same tax year.
• Joint Venture - Where a profit-seeking enterprise enters into a joint venture or business consortium agreement with another profit-seeking enterprise.
• 10. Other Situations - Other circumstances where a profit-seeking enterprise exercises substantial control over the personnel, finance, operation or management of another profit-seeking enterprise.

In addition to the above, the TP Assessment Rules provides that under certain circumstances, an individual, organization, institution and association may also be considered related parties. For example, a foundation and a profit-seeking enterprise donor are considered related parties when the donations from that donor exceed one-third of the gross fund on the foundation’s balance sheet. Moreover, relatives within two levels of relationships (e.g. spouse, parent, grandparent, child, grandchild, brother or sister) of the chairperson, CEO or person of equivalent or higher position of a profit-seeking enterprise are regarded as related parties to the enterprise.

Disclosure Requirements

The TP Assessment Rules require profit-seeking-enterprises, which satisfy regulated standards, to disclose information on related parties and related party transactions in their tax returns. If the profit-seeking-enterprise is a constituent entity of an multinational enterprises (MNE) group, the enterprise should disclose information on a constituent entity resident in Taiwan, which has been appointed by the MNE group to file Master File, the ultimate parent entity, a constituent entity resident in Taiwan appointed by the MNE group, or the surrogate parent entity to file Country-by-Country Report (CbCR). The responsible person and the chief financial person of the entity must sign off on the disclosure to ensure the completeness and accuracy of the information disclosed.

Documentation

A profit-seeking enterprise which involves related party transactions, must prepare the transfer pricing report when filing its income tax return or making its final report. A profit-seeking-enterprise, which is a constituent entity of a multinational enterprises (MNE) group, must prepare the Master File when filing its income tax return and file the master file and CbCR to its tax authority no later than 12 months after the last day of the reporting fiscal year of the MNE group.

However, an enterprise whose total revenue and related party transaction amount under the threshold prescribed by the MOF is allowed to use other documents to substitute the transfer pricing report to substantiate transactions set at arm's length. A profit-seeking-enterprise, which is a constituent entity of a multinational enterprises (MNE) group, whose gross amount of revenue and the amount of cross-border controlled transactions below the standard as prescribed by the MOF shall be exempted from filing master file. A profit-seeking-enterprise, whose total consolidated group revenue of less than the standard as prescribed by the MOF shall be exempted from filing CbCR.

When the tax authority investigates a profit-seeking enterprise according to the TP Assessment Rules, the enterprise should provide the transfer pricing report and aforementioned substituted documentation within one month of receipt of the investigation letter. For those cannot provide the documentation by the given deadline for special reason, the enterprises should apply for a one-time extension by the original deadline and the extended period should not exceed one month.

Advance Pricing Agreements

The transfer pricing regime provides criteria for taxpayers to apply for an advance pricing agreement (APA) to set the arm's length price in advance. Profit-seeking-enterprises can also choose to apply the pre-filing meetings. After receiving permission from tax authorities, they can file an APA application.

An APA may be effective for three to five years from the year of application. However, the effective period is limited to the actual transaction period, if shorter. An applicant who has abode by the APA concluded may submit an extension application by the termination date of the APA to competent tax office, including in the application documents proving that relevant facts and underlying environment affecting the APA contents did not change in essence. Upon approval of the tax office, the APA may be extended for up to five years.

After concluding an APA with the tax office, the taxpayer must file an annual report with respect to the implementation of APA to the authorities and should keep in record documents and reports provided by law/regulations.

Anti-thin Capitalization Rule

Beginning from the 2011 fiscal year, if the proportion of related party debt to equity of a profit-seeking enterprise exceeds a specified ratio, excess interest expense will not be tax deductible. Further, a profit-seeking enterprise will be required to disclose the debt-to-equity ratio and other relevant information in its annual profit-seeking enterprise income tax return.

The provisions mentioned in the preceding paragraph will not apply to banks, financial holding companies, credit co-operatives, bills finance companies, insurance companies, or securities firms.

The MOF promulgated "The Regulations Governing the Assessment of Interest Expenditure on the Debts Owed by a Profit-Seeking Enterprise to a Related Party in Accordance with the Condition that the Related Payments Shall Not be Considered as Expenses or Losses" on 22nd June, 2011. The excess interest expenditure on the debts owed directly or indirectly by a profit-seeking enterprise to a related party shall not be considered as expenses or losses if the proportion of related party debt to equity of a profit-seeking enterprise exceeds the ratio of 3:1 as stipulated by the Regulations.

Controlled Foreign Company Rule

Multinational enterprises (hereafter MNEs) often incorporate controlled foreign companies (hereafter CFC) in tax havens to retain earnings rather than distribute them to local shareholders in Taiwan to avoid taxation. To tackle this aggressive tax planning and reinforce sound anti-avoidance systems, we have drafted the CFC rules in Article 43-3 of the Income Tax Act by reference to Organization for Economic Co- operation and Development (OECD) Base Erosion and Profit Shifting Projects (BEPS) Action Plan 3 and it was promulgated by the President on July 27, 2016. The effective date of Article 43-3 shall be decided by the Executive Yuan.

Article 43-3 of the Income Tax Act regulates that a foreign company is regarded as a CFC if it is incorporated in a low-tax jurisdiction and controlled by a Taiwanese enterprise and its related parties by holding shares up to 50％ or controlling it substantially. Retained earnings of the CFC shall be attributed as taxable income whether the company profit is distributed to Taiwanese enterprise shareholders or not.

Place of Effective Management

Some MNEs' Place of Effective Management (hereafter PEM) is in Taiwan, but they are incorporated in tax havens to avoid being Taiwanese enterprises and being taxed on a worldwide income basis. To tackle this aggressive tax planning, we drafted the PEM rules in Article 43-4 of the Income Tax Act in 2016 by reference to OECD, UN Convention Model, and Cross-strait Tax Agreement, and it was promulgated by the President on July 27, 2016. The effective date of Article 43-3 shall be decided by the Executive Yuan.

Article 43-4 of the Income Tax Act regulates that a foreign company with its PEM in Taiwan will be regarded as a Taiwan's enterprise and should be taxed on its worldwide income. In other words, once a foreign company's PEM is deemed to be in Taiwan, it is subjected to tax on its worldwide income. In addition, it also can apply to the Cross-strait Tax Agreement for tax benefit.