Taiwan: Guidance on application of income tax treaties amended

Guidance on the application of income tax treaties to provide clear and up-to-date rules on assessing cases that involve income tax treaties.

Guidance on application of income tax treaties amended

The Ministry of Finance had announced guidance on the application of income tax treaties (in January 2010), which has been adopted by tax authorities for assessing the applicability of treaty benefits.

While the global tax environment has changed substantially especially with the introduction of base erosion and profit shifting (BEPS) initiative, the Ministry of Finance has closely followed this subject.

The Ministry of Finance has referred to the OECD Model Tax Convention and relevant guidance and amended the guidance on the application of income tax treaties (on 12 August 2021) to provide clear and up-to-date rules on assessing cases that involve income tax treaties.

The key amendments:

  • Establish the principal purpose test (PPT) rule to combat treaty abuse
  • Provide clear guidance regarding determination of Taiwan tax residency
  • Enhance the rule related to determination of tax residency for individuals and companies
  • Enhance the principle of determining permanent establishment (PE)
  • Provide guidance on the calculation of existence period of a PE or presence period of an individual
  • Provide clear guidance on the identification of certain types of income
  • Revise the procedures regarding issuance of Taiwan tax resident certificate

KPMG observation

The guidance establishing the PPT rule has met the minimal requirement of BEPS Action 6. However, the guidance does not provide further or more detailed rules on how to identify whether one of the principal purposes of a transaction or arrangement is to obtain treaty benefits. This will be the area that needs further observation on how tax authorities apply this principle after implementation of the amended guidance.

Further, the guidance has provided more specific rules on the definition of royalties and other types of income. Specifically, it clarifies the order of applying different income types for payments relating to mixed contracts and if a foreign enterprise derived Taiwan-sourced income in different income categories such as dividends, capital gains or royalties/technical fees, the rules for such income types would prevail over the rule for business profits.

Read a September 2021 report prepared by the KPMG member firm in Taiwan


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