Consideration for Investment Structure

Capital vs. Loan
Capital Contribution - Capital contributed from foreign investors should be approved by the Investment Commission of the Ministry of Economic Affairs (MOEA) in advance. The dividend income received by foreign investors is subject to 20% withholding rate if the investment is approved by the Investment Commission of the MOEA.
Shareholders’ Loan - A profit-seeking enterprise can be financed by a shareholders’ loan. The interest is basically tax deductible by Taiwan enterprise, provided that the interest rate is based on the market rate. The interest to the foreign lenders is subject to 20% withholding tax, unless the withholding tax is reduced by an income tax treaty with Taiwan.
Treaty Utilization - Taiwan, ROC has entered into income tax treaty with several countries, including Singapore, New Zealand, Australia, Netherlands, UK, etc. Under a treaty, a tax resident of the treaty country can pay withholding tax on dividends, interest, and royalties from Taiwan at a lower withholding tax rate. In general, it is reduced from 20% regular rate to 10% or 15% treaty rate.

Source of Equipment
Purchase - A profit-seeking enterprise can purchase equipment for its business use. Equipment purchased will be recorded as fixed asset at its acquisition cost and depreciated over its service life. The profit-seeking enterprise can claim the depreciation expenses on its income tax returns.
Capital Contribution - An equipment owner can contribute the equipment as capital to the profit-seeking enterprise and becomes a shareholder. Thus foreign investors can contribute property other than cash to an ROC profit-seeking enterprise as capital. However, this kind of foreign investment needs to be approved by the Investment Commission of the MOEA.
Lease - Another source of equipment is through a lease arrangement. If an equipment lease of an ROC profit-seeking enterprise meets one of the following criteria, the lease is a capital lease:
1. The lease unconditionally transfers ownership of the equipment to the lessee by the end of the lease term.
2. The lease contains a bargain purchase option.
3. The lease term is equal to 75% or longer of the prescribed service life of the leased equipment.
4. The present value of the lease calculated on the basis of total rental and bargain purchase paid at the start of the lease term is 90% or more of the book value of the leased equipment.

In the case of a capital lease, the lessee should record the equipment as the fixed asset, and the depreciation and interest expenses resulted from the lease are deductible expenses.

An equipment lease which meets none of the above criteria is an operating lease. Under an
operating lease, the lessee will not record the equipment as fixed asset and accordingly, will not recognize depreciation. However, the rent paid to the lesser is the lessee’s deductible expense.

Intellectual Property/ Know-how
Capital Contribution - An intellectual property owner can contribute his intellectual property or know-how as capital to a company and thus becomes a shareholder. Any excess of shares obtained by the shareholder over the cost of the intellectual property should be subject to income tax.
License - A profit-seeking enterprise having its head office outside the ROC territory can license the intellectual property in the ROC territory and charge license fees or royalties. The license fees or royalties should be subject to 20% withholding tax. If the MOF’s approval is obtained, the license fees or royalties received by the said foreign profit-seeking enterprise can be exempt from income tax. The withholding tax rate may also be reduced through tax treaty utilization.

Technical Services
A foreign enterprise can provide technical support to its ROC entity for a service fee. Normally, the fee is subject to withholding tax at 20% rate. However, the foreign enterprise may apply to the MOF for review as to whether its fee qualifies for technical service fee. With the MOF’s approval, 15% of the gross technical service fee would be deemed the foreign enterprise’s taxable profit, subject to withholding tax at 25% rate. As such, the effective withholding tax on the gross technical service fee is reduced from 20% to 3.75% (15% deemed profit x 25% withholding tax rate).

General and Administration Expense Allocation
A foreign enterprise can allocate its general and administrative expenses to its ROC branch. When the following conditions are met, the allocated general and administrative expenses are tax deductible to the branch, and not taxable to the foreign head office:
• Where the foreign head office does not engage in active business activities itself (i.e. non-operational) but does so through subordinate business units, the head office’s administrative (non-operational) expenses can be allocated among its operating business units and its branches.
• The branch has not included the allocated administrative expenses in the cost of purchases from the head office, nor has it paid interest or rent on funds or other properties provided by the head office.
The allocated general and administrative expenses do not exceed the ceiling, which is calculated as a percentage of the branch’s operating revenue to the head office’s total operating revenue. The allocated general and administrative expenses could be supported by a statement of general and administrative expenses allocation and the head office’s financial statements. These two supporting documents should be certified by a certified public accountant and authenticated by an ROC consulate or any other agency approved by the ROC government or by the foreign tax authorities.

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