Profit-seeking enterprises deriving income from countries that have signed tax agreements with Taiwan may apply to the treaty partner country for income tax reduction or exemption under the income tax agreement. If foreign taxes are overpaid due to failure to apply for treaty benefits, such overpaid amounts cannot be credited against Taiwan’s tax liability.

The National Taxation Bureau of Kaohsiung, Ministry of Finance stated that Paragraph 2, Article 3 of the Income Tax Act stipulates that profit-seeking enterprises with their head office in Taiwan shall be subject to profit-seeking enterprise income tax on their total profit-seeking enterprise income both within and outside Taiwan. Foreign income taxes already paid according to the tax laws of the source country may be credited against the total profit-seeking enterprise income tax liability within prescribed limits. Article 124 of the Income Tax Act provides that where income tax agreements signed between Taiwan and other countries contain special provisions, such provisions shall apply. Therefore, when profit-seeking enterprises derive income from tax treaty countries, and such income is exempt from taxation by the treaty partner or subject to a maximum tax rate under the income tax agreement, they should first apply to the treaty partner country for tax reduction or exemption under the income tax agreement. If profit-seeking enterprises fail to apply for income tax treaty benefits and consequently overpay foreign taxes, according to Paragraph 2, Article 36 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income, such overpaid taxes cannot be credited against Taiwan’s enterprise income tax liability.

The Bureau provides the following example: Taiwan Company A reported service income of NT$5 million from Vietnam Company B in its 2022 profit-seeking enterprise income tax return and claimed a foreign income tax credit of NT$1 million for income taxes paid in Vietnam. However, Taiwan and Vietnam have signed the “Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between the Taipei Economic and Cultural Office in Vietnam and the Vietnam Economic and Cultural Office in Taipei.” According to Paragraph 1, Article 7 of this Agreement regarding business profits, profits of an enterprise of one contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. Since Company A had no permanent establishment in Vietnam, its service income from Vietnam Company B falls under the business profits category of the aforementioned agreement. According to the Agreement, such income should only be subject to income tax in Taiwan, with Vietnam exempting it from taxation. Since Company A did not apply to Vietnamese tax authorities for tax treaty benefits and overpaid Vietnamese taxes, according to Paragraph 2, Article 36 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income, it cannot claim credit for this against its Taiwan profit-seeking enterprise income tax liability. The reported tax credit of NT$1 million was entirely disallowed by the Bureau, resulting in additional tax assessment.

The Bureau would like to remind profit-seeking enterprises that when deriving offshore income, they should pay attention to whether there are applicable tax treaty benefits for income tax reduction or exemption. If relevant provisions are met, they should first apply to the treaty partner country to protect their own interests. For inquiries, the public may call the toll-free service number 0800-000-321 or visit the Bureau’s website （https://www.ntbk.gov.tw） to make inquiries online using the National Tax Smart Assistant ＂National Tax Helper.＂

Provided by: Profit-seeking Enterprise Income Tax Division
Contact Person: Ms. Lee.            Phone:（07）725-6600 ext. 7150
Contributed by: Ms. Lin.             Phone:（07）725-6600 ext. 7157