Managing Taiwan Withholding Tax Risk for Foreign Companies
專精於國際投資、基金設立與區塊鏈監管法制，具多年跨境交易與公司法顧經驗。
Learn how foreign businesses can leverage Taiwan’s Section 25 to reduce withholding tax and optimize cash flow.
Following our previous discussion on how foreign companies can utilize Taiwan's tax treaties to minimize withholding tax exposure, it is important to highlight another practical tool available for foreign businesses — Taiwan's Income Tax Act Section 25. In certain circumstances, this mechanism offers a faster, more predictable method to manage tax risks compared to direct treaty exemption applications.
Background: Challenges in Applying for Business Profits Exemption
As noted in recent cases, while foreign enterprises can apply for treaty-based business profits exemptions to avoid Taiwan withholding tax, the review process can be lengthy and stringent. To qualify for business profits exemption, a company generally has to demonstrate that it does not have a permanent establishment (PE) in Taiwan. This requires evidence such as no employees or agents stationed in Taiwan and no service days exceeding the 183-day threshold.
However, based on practical experience, the National Taxation Bureau (NTB) often conducts very strict reviews of such applications, and approval times can be lengthy. During this period, Taiwan clients may still be legally required to withhold 20% tax at the time of payment, leading to significant cash flow pressure for foreign suppliers and additional complications when later seeking a refund.
Section 25 of Taiwan's Income Tax Act: A Viable Solution
To address this, foreign companies, particularly service providers, may apply to use Taiwan's Income Tax Act Section 25 as an interim solution. Under Section 25:
- Foreign companies engaged in activities such as international transport, construction contracting, providing technical services, or machinery and equipment leasing, etc., may apply to the Ministry of Finance (MOF) or NTB to have their taxable income deemed as a fixed percentage of Taiwan-source revenue.
- For technical service income, the deemed taxable income is 15% of Taiwan-source gross revenue.
- Applying the standard Taiwan corporate income tax rate of 20% on this 15% deemed income results in an effective tax rate of 3% on the gross revenue.
Practical Example
If a foreign company provides technical consulting services to a Taiwanese client and earns NTD 10 million:
- Deemed Taiwan-source taxable income = 10 million × 15% = 1.5 million
- Tax payable = 1.5 million × 20% = 300,000
- Effective tax burden = 300,000 / 10 million = 3%
Thus, the Taiwanese client may apply a 3% withholding tax rate upon payment, substantially easing cash flow compared to a 20% withholding.
Process Overview
- Submit an application for Section 25 treatment to the NTB.
- Await approval (which typically has a faster review time compared to DTA applications).
- Upon approval, the Taiwanese payer withholds tax at 3% when making payments.
- Subsequently, the foreign company can still pursue a formal treaty exemption under the DTA, and if approved, apply for a refund of the 3% tax withheld.
Advantages of Using Section 25 First
- Reduces immediate cash flow pressure on foreign companies.
- Simplifies withholding tax procedures for Taiwanese payers.
- Provides faster certainty while awaiting DTA exemption results.
- Reduces the risk of stricter scrutiny during large refund applications.
Important Considerations
- Section 25 application must be submitted and approved before payments are made, otherwise the payer must apply the standard 20% withholding.
- The foreign company should still ensure that it maintains evidence supporting its non-PE status if it intends to later apply for full treaty exemption and tax refund.
| Item | Income Tax Act Section 25 | Tax Treaty (DTA) Business Profits Exemption |
|---|---|---|
| Purpose | Provide a deemed-profit method for quick and predictable withholding tax calculation | Apply full exemption from Taiwan withholding tax under a tax treaty |
| Applicable To | International transportation, construction, technical services, equipment leasing, etc. | Foreign enterprises with no permanent establishment (PE) in Taiwan |
| Effective Tax Rate | ~3% on gross revenue (for technical services) | 0%, if approved |
| Review Difficulty | Moderate, generally faster and less strict | High, strict review of PE status |
| Cash Flow Impact | Low withholding tax (3%) minimizes cash pressure | High initial withholding (20%) until refund is approved |
| Approval Timing | Usually faster | Often lengthy; several months or more |
| Risk Level | Low → predictable rate | Higher → strict audit risk on PE determination |
| Later Refund Option | Yes, can still apply for DTA refund after Section 25 approval | Difficult |
Conclusion
Key takeaway: Section 25 allows for faster approval and lower cash flow impact while maintaining compliance flexibility.
While applying for treaty-based business profits exemption remains the ideal outcome for foreign enterprises without a PE in Taiwan, practical limitations often make Section 25 of the Income Tax Act a highly valuable interim strategy. Foreign companies engaging in technical services or similar activities should carefully assess both options to effectively manage Taiwan withholding tax exposure.
Our team can assist you in evaluating your Taiwan-source income structures, preparing Section 25 applications, and supporting subsequent treaty-based refund procedures to optimize your tax position in Taiwan. Please contact us for tailored advice and assistance.