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Taiwan on reducing withholding rate of Royalty Fees paid to overseas payees

Taiwan companies pay IP(Intellectual Property) Royalty Fees to overseas payees, in the absence of applying for tax exemption, a 20% withholding rate is required when making payment.
There are two ways to reduce withholding rate:
To apply for the upper limit tax rate based on DTA (Double Tax Avoidance) agreement;
To apply for the 0% tax exemption on royalties under Article 4, Paragraph 21 of the Income Tax Law.

E-mail: tpe4ww@evershinecpa.com
or
Contact us during office hours  (Taipei and China Time Zone)
Director Jerry Chu, USA Graduate School Alumni and a well-English speaker
Mobile: +886-939-357-735
Tel No.: +886-2-2717-0515 ext. 103

Scenario: A Taiwanese semiconductor company (Abbreviated as TWA ) asked us below questions.
Our company TWA has to continue Pay the IP license fee to foreign companies, and some of them require that the Withholding Tax must be bear by us TWA。
So the invoice to be issued by foreign companies must be “the foreign company’s actual amount + Withholding Tax” to avoid the foreign company from issuing the wrong invoice amount。
Therefore, we need to understand withholding Tax % when paying to each company located in the United States, the United Kingdom, India, Singapore and other countries.

Royalty-tw-010
What is the IP license fee?

Answer:
In order to introduce production technology, trademark rights or computer program copyrights, Taiwanese companies often need to pay royalties to foreign licensing companies. These are collectively called intellectual property rights royalties.

Royalty-tw-020
When paying royalty fees to overseas companies, what percentage is withheld under normal circumstances?

Answer:
According to the current tax law, if no tax exemption is applied for, the payment must be withheld at a 20% withholding rate.
However, because some foreign manufacturers require that the Withholding Tax must be paid by the Taiwanese company, the invoice that the Taiwanese company needs to ask the manufacturer to issue must be “the manufacturer’s actual amount + 20% Withholding Tax”.

Royalty-tw-030
When paid royalty fees to overseas companies, can it be adopted reduced withholding Tax Rate?

Answer:
There are two ways to reduce withholding tax rate on royalties:
*Application for applicable DTA tax treaty upper limit tax rate:
For example, if the country, where the IP-licensed-foreign-company is located ,has signed a tax agreement with Taiwan.
*Application for royalty exemption under Article 4, Paragraph 21 of the Income Tax Act:
For example, the patent rights, trademark rights or computer program copyrights introduced by Taiwanese enterprises are used to manufacture new products, improve production processes or provide new production technologies.

Royalty-tw-040
How to apply for DTA tax treaty upper limit Withholding Tax Rate of royalty fee paid to overseas payees in Taiwan?

Answer:
If the country ,where the licensed foreign company is located ,has signed a tax (DTA) agreement with Taiwan, the Taiwanese company can fill out the upper limit tax rate declaration form when paying the royalties, and attach the resident certificate issued by the foreign tax authority and the beneficial ownership certificate issued by the foreign company.
If you submit documents such as personal certification, authorization deed, and royalty calculation details, apply to the tax bureau for prior approval, and then you can make a withholding declaration based on the upper limit tax rate in the tax agreement (generally around 10%).
Currently, there are 34 DTAs signed and in effect with Taiwan.
As long as you sign royalty contract with a foreign for-profit enterprise , you will have the opportunity to reduce the royalty withholding tax by applying the tax treaty royalty ceiling tax exemption provisions, which can be reduced from 20% to around 10%.
Among them, the royalty fee paid for the use of or the right to use industrial, commercial or scientific equipment under certain tax treaties can be reduced to 3% to 5%.
For example: Poland 3%, Czech Republic 5%, Saudi Arabia 4%, Slovakia 5%.
List of dividend, interest and royalty withholding rates (%) in Taiwan
* Non-treaty Countries 20 %
*Australia 12.5 %
*Austria 10 %
*Belgium 10 %
*Canada (French text ) 10 %
*Czech Republic , 5% or 10 %
The consideration paid for the use of or the right to use industrial, commercial or scientific equipment shall not exceed 5% of the total royalties.
*Denmark 10 %
*France (French text) 10 %
*Gambia 10 %
*Germany (German text) 10 %
*Hungary 10 %
*India 10 %
*Indonesia 10%
*Israel 10%
*Italy 10% 
*Japan 10 %
*Korea (Korean text) 10 %
*Kiribati 10 %
*Luxembourg 10 %
*North Macedonia (formerly North Macedonia) “Macedonia”)│North Macedonia 10 %
*Malaysia 10 %
*New Zealand 10 %
*Netherlands 10%
*Paraguay 10 %
*Poland 3% or10 %
The amount paid for the use of or the right to use industrial, commercial or scientific equipment shall not exceed 3% of the total royalties.
*Saudi Arabia (Arabic text) 4% or 10%
The amount paid for the use of or the right to use industrial, commercial or scientific equipment shall not exceed 4% of the total royalties.
* Senegal│Senegal 12.5 %
*Singapore 15 %
*Slovakia 5% or 10 %
The amount paid for the use of or the right to use industrial, commercial or scientific equipment shall not exceed 5% of the total royalties.
*South Africa 10 %
*Eswatini (formerly “Swaziland”) 10 %
*Sweden 10%
*Switzerland 10%
*Thailand (Thai text) 10 %
*UK ( UK (Original Agreement) 10 %
*UK (Amending Protocol) 10 %
*UK (Consolidated Text) 10 %
*Vietnam 15%
Above being updated at 2024/03/22
In addition, when Taiwan’s profit-making enterprises apply for tax treaty royalty ceiling tax rates and file withholding declarations, they should state the applicable tax agreement provisions and attach the following documents for review by the tax authorities:
*Tax residency certificate and benefits issued by foreign profit-making enterprises Owner’s certification documents;
*Licencing or technical cooperation service contract (including Chinese translation) and royalty calculation details.
If Taiwanese companies want to apply for the applicable tax treaty upper limit tax rate for intellectual property licencing fees paid to overseas companies, they can apply to the Ministry of Finance’s Northern District Internal Revenue Service.
You can find relevant application forms and guidance in the Tax Agreement Area of ​​the Northern District Internal Revenue Service for DTA of the Ministry of Finance

Royalty-tw-050
How to apply for zero Withholding Tax Rate on royalties under Article 4, Paragraph 21 of the Income Tax Actin Taiwan?

Answer:
According to Article 4, Paragraph 21 of the Income Tax Law Royalties are tax-free Article 1: If the patent rights, trademark rights or computer program copyrights introduced by Taiwanese enterprises are used to manufacture new products, improve production processes or provide new production technologies, if they meet the following requirements and are approved by the Industrial Bureau and the National Taxation Bureau, they will be eligible. Opportunities to apply for royalty withholding and tax exemption:
1. Patent rights:
1.1 Patent rights must be approved and registered by domestic or foreign competent authorities
1.2 There is indeed substantial technology introduction, and it is a key technology that cannot be provided domestically, or it can be provided domestically, but its performance cannot meet the requirements Product specification requirements of Taiwanese enterprises.
1.3 The country where the foreign company belongs must be a member of the World Trade Organization.
1.4 Taiwanese enterprises are limited to important production enterprises and their related technical service industries.
2. Trademark rights:
2.1 Trademarks must be registered with the Intellectual Property Bureau of the Ministry of Economic Affairs.
2.2 It is necessary to apply for authorization and registration with the Intellectual Property Bureau of the Ministry of Economic Affairs.
2.3 The trademarks of foreign companies must be listed alongside the trademarks of Taiwanese companies on goods, services or related objects.
2.4 Taiwanese enterprises are limited to manufacturing and related technical service industries.
3. Computer program copyright:
3.1 The country where the foreign company belongs must be a member of the World Trade Organization.
3.2 Taiwanese enterprises are limited to manufacturing and related technical service industries.
Principles for review of tax exemption cases for royalties and technical service remuneration received by foreign profit-making enterprises from manufacturing technical services and power generation industries.
In addition, based on the principles for determining royalty exemptions, applicants should first submit the authorization contract and relevant documents to the central authority in charge of the target industry ( After applying for project approval from the Industrial Bureau of the Ministry of Economic Affairs, they will submit supporting documents and apply to the tax collection authority (the National Taxation Bureau) for verification of tax exemption.
That is to say, for the same authorization contract, multiple approvals from the Ministry of Economic Affairs and the National Taxation Bureau must be obtained before the royalties can be exempted from income tax.
The application procedure is complex and due to the innovative nature of the patented technology, the current approved tax exemption period is limited to three years. However, an application may be made according to the same procedure before the expiration of the approved tax exemption period.
Royalty and technical service remuneration tax-free zone
to apply for a tax exemption certificate for technical service remuneration and royalties from foreign profit-making enterprises

Royalty-tw-060
What are not applicable circumstances under Article 4, Paragraph 21 of the Income Tax Act ?

answer:
Review principles for tax exemption cases for royalties and technical service remuneration received by foreign profit-making enterprises from manufacturing technical services and power generation industries. Article 4, Paragraph
Paragraph 21 of the Income Tax Act has strict application requirements for royalties tax exemption. Taiwanese companies that wish to apply should pay special attention to this.
The following situations are not applicable:
1. If the imported technology is for research and development, it will not be applicable because it is not an introduction of production-related technology;
if the imported patented technology is still in the research and development stage and it still needs to be jointly developed with foreign profit-making enterprises, it is not applicable. The joint development technology research and development expenses paid for mass production use are not exempt from income tax.
2. If the imported technology is used for processing and use by foreign affiliated enterprises, it shall not be applicable because it is not used by Taiwanese enterprises themselves.
If the patented technology introduced by Taiwan’s profit-making enterprises is produced overseas by other overseas OEMs instead of being manufactured and used in Taiwan itself, the income tax exemption cannot be applied.
3. The owner and licensor of the patent right shall be the subject of tax exemption for royalties. If the original owner authorizes the patent right to another foreign profit-making enterprise through authorization, and then the foreign profit-making enterprise sub-licenses it to a Taiwanese profit-making enterprise, the foreign profit-making enterprise cannot apply for income tax exemption because it is not the owner of the patent right. Regulation.
4. If a foreign profit-making enterprise requires the payment of infringement “royalty money” on the grounds that a Taiwanese profit-making enterprise infringes rights, this is a matter of compensation for infringement. The nature of the “compensation” or “settlement money” paid is other income and is not Royalties for the authorized use of rights cannot be exempted from income tax.

Contact us:
E-mail: tpe4ww@evershinecpa.com
or
Contact us during office hours  (Taipei and China Time Zone)
Director Jerry Chu, USA Graduate School Alumni and a well-English speaker
Mobile: +886-939-357-735
Tel No.: +886-2-2717-0515 ext. 103

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(version: 2022/03)
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