Taiwan imposes a withholding tax on payments made to foreign individuals and entities. It is crucial to understand the withholding tax rules to avoid receiving less money when trading with Taiwanese companies because of the withholding tax applied.
Withholding Tax Obligations
When a Taiwanese entity makes a payment to a foreign individual or entity, it is generally required to withhold a portion of that payment for tax purposes. This withholding tax ensures that the Taiwanese government collects taxes on income sourced from Taiwan. The withheld amount must be paid to the tax authorities within a specified timeframe, along with the submission of a tax return. Failure to comply can result in penalties.
Tax Rates for Payments to Foreign Entities
Taiwan applies different withholding tax rates depending on the nature of the payment made to foreign entities. These are categorized as follows:
Employee Salaries: 18% if monthly salary exceeds 1.5 times the minimum wage; 6% otherwise.
Profit Distributions: 21%.
Other Income (e.g., royalties, licensing fees, service fees): 20%.
For instance, if a Taiwanese company is required to pay a foreign service provider NTD 100,000, the gross amount before withholding tax would be calculated as follows:
Base for withholding tax = NTD 100,000 ÷ (1 - 20%) = NTD 125,000
Withholding tax = NTD 125,000 × 20% = NTD 25,000
Net payment to the foreign company = NTD 125,000 - NTD 25,000 = NTD 100,000
In this example, the foreign company receives the full NTD 100,000 after tax withholding, as specified in the contract. It is important to note that the withheld tax is non-refundable for the foreign recipient, although it may be eligible for tax credit in their home country, depending on local regulations.
Is the Withholding Tax Rate Always 20%?
While the standard withholding tax rate for most service-related payments to foreign companies is 20%, there are circumstances under which withholding may not be required, or a lower rate may apply. According to Article 8 of Taiwan’s Income Tax Act, if the income is classified as being sourced from outside of Taiwan, it may not be subject to withholding tax. Specifically, remuneration for services rendered outside Taiwan may not require withholding if certain criteria are met, such as the service being entirely performed outside of Taiwan without significant involvement from Taiwan-based individuals or entities.
However, in practice, most payments for services rendered by foreign companies, regardless of where or how the service is provided, are generally considered Taiwan-sourced income. Unless there is clear guidance excluding the income from withholding, not withholding the tax may present significant tax risks for the Taiwanese company. As a result, Taiwanese companies typically withhold taxes to avoid potential complications.
Foreign companies can apply, either directly or through a representative in Taiwan, to have the net profit rate and contribution ratio approved to lower the withholding tax amount. However, due to the difficulty in providing the necessary evidence, it is relatively rare for foreign companies to successfully obtain a tax refund.
You can find more details on Article 8 of the Income Tax Act here.
Additional Applicable Deductions
According to Article 25 of the Income Tax Law, when a foreign company provides technical services within Taiwan and encounters difficulties in calculating the allocation of costs and expenses, it can apply to have its taxable income recognized as 15% of its domestic revenue. The withholding tax will then be applied to this recognized income, effectively reducing the final tax rate to 3% (i.e., 15% × 20%), which is a significant reduction from the standard rate.
However, it is important to ensure that the services provided by the foreign company meet the legal definition of "technical services." Services that do not involve specialized skills or knowledge, such as general information transmission, administrative tasks, or labor dispatching, are excluded from this tax reduction provision.
Understanding Taiwan's withholding tax rules is crucial for foreign companies operating in or doing business with Taiwan. By being aware of the tax rates, applicable exceptions, and potential tax implications, foreign entities can effectively manage their tax obligations and avoid unnecessary financial burdens. For further guidance or specific inquiries, it is advisable to consult with a tax expert specializing in Taiwanese tax law.
Copyright © 2025 by Del Sol CPA Services