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.
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.
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:
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.
Taiwan allows the following fixed asset depreciation methods: the straight-line method, declining balance method, sum-of-years'-digits 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.
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:
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.
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.
另自2013年度起，對長期持有優惠，就營利事業出售持有滿3年以上股票之交易所得，於減除當年度出售持有滿3年以上股票之交易損失後之餘額，按半數計入當年度證券交易所得。
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 (After or in 2023) = [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$600,000 ] x 12%
The minimum taxable income and tax rates for profit-seeking-enterprise income tax are as follows:
| Taxable Income Bracket ( NT$ ) | Tax Rate |
|---|---|
| 120,000 or less | None |
| Over 120,000 | 20% of total taxable income, but income tax liability may not exceed 50% of the portion of taxable income over NT$120,000 |
(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$120,000.)
| Taxable Income | Amount (NT$) |
|---|---|
| Net operating revenue | 100,000,000 |
| Less: Operating cost | ( 40,000,000 ) |
| Gross margin | 60,000,000 |
| Less: Operating expenses and losses | ( 35,000,000 ) |
| Operating margin | 25,000,000 |
| Non-operating revenue | 2,000,000 |
| Less: Non-operating expenses and losses | ( 3,000,000 ) |
| Net income | 24,000,000 |
| Less: Loss carryforwards used in current year | ( 3,000,000 ) |
| Less: Tax-exempt income | ( 4,000,000 ) |
| Less: Tax-exempt capital gain | ( 2,000,000 ) |
| Add: Non-deductible expenses | 1,000,000 |
| Taxable income | 16,000,000 |
| Tax rate | 20% |
| Tax payable | 3,200,000 |
| Less: Withholding tax paid | ( 200,000 ) |
| Less: Provisional tax paid | ( 1,500,000 ) |
| Income tax due | 1,500,000 |
The tax system of income tax on the consolidated income from house and land transactions was first introduced on January 1, 2016 and amended in 2021. Taking effect from July 2021 onwards, the latest regulations of the amendment are briefly introduced as follows:
Income derived from transactions of the following:
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.
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.
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:
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.
Article 43-1 of the Income Tax Act allows the tax authority, with the approval of the MOF, based on arm's length transaction price, to make an adjustment to the revenue, costs, expenses, and profit or loss 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, 13 November 2017 and 28 December 2020 which provide that transfer pricing documentation, investigation, and assessment of related party transactions should be done according to the said Rules.
The TP Assessment Rules include a specific definition of related parties, as well as examples of what constitutes a related party:
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 enterprise 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.
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 a 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 submitting Country-by-Country Report (CbC report). 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.
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 an MNE group, must prepare the master file when filing its income tax return and submit the master file and CbC report to its tax authority within one year after the end of the reporting fiscal year.
However, an enterprise whose total revenue and the amount of related party transactions 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 an MNE group, may be exempt from the submission of the master file if its total revenue or the amount of cross-border controlled transactions is below the standard prescribed by the MOF. A profit-seeking-enterprise may be exempt from the submission of CbC report if the total consolidated group revenue during the fiscal year immediately preceding the reporting fiscal year is below the standards prescribed by the MOF.
When the tax authority investigates a profit-seeking enterprise according to the TP Assessment Rules, the enterprise should provide the transfer pricing report or the aforementioned substituted documentation within one month since receipt of the investigation letter. For those cannot provide the documentation by the given deadline for special reasons, the enterprise should apply for a one-time extension by the original deadline and the extended period should not exceed one month.
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 the 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 in accordance with law/regulations.
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.
Multinational enterprises (hereafter MNEs) often incorporate controlled foreign companies (hereafter CFC) in tax havens to retain earnings rather than distribute them to shareholders for the purpose of avoiding taxation. To tackle this aggressive tax planning and to reinforce sound anti-avoidance systems, the CFC rules for profit-seeking enterprises were drafted 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. On January 14, 2022, the Executive Yuan has designated that Article 43-3 of the Income Tax Act shall be enforced from the 2023 tax year.
Article 43-3 of the Income Tax Act regulates that for a Taiwanese enterprise and its related parties holding 50% or more of the shares or capital of a foreign company in a low-tax jurisdiction, or having control over such a foreign company, the said foreign company is a CFC. CFC’s earnings shall be included in the taxable income of Taiwanese enterprise shareholders whether the earnings are distributed to such shareholders or not.
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 43-4 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 Tax Agreement for tax benefit.
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