Taiwan: Pre-approval process for beneficial withholding tax rate under income tax treaty with Luxembourg

New procedure for eligible foreign institutional investors to apply for pre-approval under income tax treaty

Income tax treaty with Luxembourg

The Taiwanese tax authority has introduced a new procedure for eligible foreign institutional investors to apply for pre-approval under the income tax treaty between Luxembourg and Taiwan.

Background

An income tax treaty for the avoidance of double taxation between Luxembourg and Taiwan has been in force since 1 January 2015. To enjoy benefits under the treaty, eligible foreign institutional investors must submit a pre-approval application each year with the Taiwanese tax authority—this entitles them to benefit from a reduced 15% withholding tax rate on Taiwanese dividend payments (instead of the rate of 21% pursuant to Taiwanese domestic tax law). When the pre-approval application has been successfully processed by the Taiwanese tax authority, the foreign institutional investors may benefit from tax relief at source for the entire calendar year. If the pre-approval is not granted in time, as an alternative, foreign institutional investors may seek a tax refund at any time in the following five years.

Changes to pre-approval process

In response to the increase in dividend distribution frequency (up to four times a year), the Taiwanese tax authority has notified the Taiwan Stock Affairs Association of a new procedure intended to facilitate implementation of the pre-approval letter by stock custodians and tax withholding agents (i.e., listed companies). 

The new procedure allows some eligible foreign institutional investors to elect to apply for a pre-approval of a longer duration (up to 18 or 24 months) if certain conditions are met.

The new procedure is effectively an adjustment to the standard practice for the purpose of allowing a reduced tax rate to apply to the dividends distributed in the first quarter of the year, which would benefit those eligible foreign institutional investors and additionally minimize the need of having to file additional tax refund claims. However, the new procedure does not change the fact that the treaty eligibility of the foreign institutional investor must still be evaluated on an annual basis, since the foreign institutional investor’s status may change during the duration of the pre-approval.

Read a November 2021 report prepared by the KPMG member firm in Luxembourg

 

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