The Ministry of Finance states that, in order to provide certainty to tax cases applying for benefits provided by Taiwan’s Income Tax Agreements, as well as to meet the practical needs for administrating tax collection, amendments to the “Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income” (hereinafter referred to as the Regulations) are promulgated on August 12, 2021. The amended Regulations has come into effect since the date of promulgation except the rule regarding the application of specified maximum tax rate for dividends which has been in effect retroactively since January 1, 2019.
The Ministry of Finance explains that the Regulations was originally promulgated in January 2010. Since then, the Income Tax Agreements between Taiwan and its 16 treaty partners including Germany, France, Japan, etc. have come into effect. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) released the final reports of Action Plans on Base Erosion and Profit Shifting (BEPS) in October 2015, and issued at the end of 2017 its latest edition to the Model Tax Convention on Income and on Capital (hereinafter referred to as the Model Tax Convention) and associated Commentaries. In responding to these international trends and its administrative needs, the Ministry of Finance has amended the Regulations by reference to the latest international Model Tax Conventions and its Commentaries, the recent laws and regulations in Taiwan, the practices of the application to the Income Tax Agreements in many countries, as well as the opinions collected from the public. Key changes made to the Regulations are as follows:
1. Clarify applying the Principal Purpose Test (PPT) as a general rule when dealing with a treaty-abuse case.
A tax collection authority-in-charge may collect relevant facts and circumstances of tax cases applying for benefits provided by Taiwan’s Income Tax Agreements. In the case that such authority-in-charge reasonably concludes, having regard to all relevant facts and circumstances, that one of the principal purposes of the related transaction or arrangement is to obtain a treaty benefit directly or indirectly, and that the granting of that treaty benefit in that situation is not in line with the intended purpose provided by the applicable provisions of the Income Tax Agreement, the Principal Purpose Test provision under the applicable Income Tax Agreement or relevant provisions under the Taxpayer Rights Protection Act shall be applied. The inclusion of this rule ensures that Taiwan will fulfill its commitments on implementing the minimum standard of the BEPS Action 6 for preventing the granting of treaty benefits in inappropriate circumstances (Article 4 of the Regulations).
2. Clarify persons who would qualify for Taiwan’s tax residents for treaty purposes.
Taiwan’s “organization or institution, which is established for educational, cultural, public welfare or charitable purposes,” “government agency,” and “entity that is held or controlled by the government and meets the relevant requirements,” etc. are Taiwan’s tax residents for treaty purposes. They are eligible to apply for benefits provided by an Income Tax Agreement (Article 5 of the Regulations).
3. Strengthen the rule for determining the sole resident status of a person who has a dual-resident status when applying for benefits provided by an Income Tax Agreement.
In the case of an individual with a dual-resident status, one of the items to determine the sole residency is “permanent home.” The Regulations defines the criteria for determining his/her “permanent home.” This determination is based on whether the individual is maintaining a domestic place available to him/her for accessing at any time and this situation continues for a period of 183 days or more. In the case of a company with a dual-resident status and the applicable Income Tax Agreement adopts the place of effective management (PEM) for consideration of the sole residency, the Regulations clarify the associated determination rules of the PEM by reference to the relevant Commentaries of the OECD Model Tax Convention and the provisions under Article 43-4 of the Income Tax Act (Article 6 of the Regulations).
4. Strengthen the rule for determining a permanent establishment (PE).
When determining whether there is a fixed place of business under the concept of a PE, the Regulations denotes that a particular location within which the activities are moved would be required to be identified as constituting a coherent whole commercially and geographically with respect to its associated business activity. This inclusion in the Regulations reduces relevant disputes from being raised (Article 7 of the Regulations).
5. Clarify the calculation of the relevant duration or the staying period stipulated in an Income Tax Agreement.
When the duration period for determining a permanent establishment (or a fixed base) or the staying period for deciding an individual’s present stipulated in an Income Tax Agreement is to measure such period within any twelve month period commencing or ending in the relevant year concerned, the Regulations clarifies how and to what extent that calculation may be applicable (Article 9 and Article 17 of the Regulations).
6. Explain the rule for determining an activity that is preparatory or auxiliary in nature, items of profits which would be covered by the tax exemption provided for the international transport activity, the applicable rule for dividends and certain items of royalties, the determination for capital gains from the alienation of shares where the value of these shares is derived from immovable property, the determination of a fixed base, the exception rule when applying income from employment article for the calculation of relevant periods, and the rule for determining which articles may be applicable for the purpose of allocation of taxing right (Articles 11 to 17 and Articles 20 to 22 of the Regulations).
7. Clarify when a person, with a dual-resident status under the applicable Income Tax Agreement, is considered as only a resident of the other contracting state for treaty purposes, this result has no effect on that person’s applicable tax administrative procedure in Taiwan (Article 31 of the Regulations).
8. Amend the relevant procedural rules for issuing a Resident Certificate from Taiwan’s tax collection authority-in-charge.
While the other contracting state requests Taiwan to confirm the identity of its resident in the form provided by that other contracting state, Taiwan’s tax collection authority-in-charge shall be allowed to do so. Regarding the request for and the issuance of relevant documents to Taiwan’s investment trust funds for their treaty application, the relevant streamlined procedures are included in the Regulations according to the Explanatory Decree No. 10600686840 issued by the Ministry of Finance on March 6, 2018 (Article 38 of the Regulations).
The Ministry of Finance further states that the amended Regulations will make Taiwan’s overall applications regarding its Income Tax Agreements more reasonable and predictable, and will create a more favorable tax environment for foreign investments. Such amended Regulations incorporates the relevant minimum standards required by the BEPS Action Plans (e.g., the Principle Purpose Test in Article 4 and the Mutual Agreement Procedure in Article 42 of the Regulations), is in line with the relevant interpretations of the latest international Model Tax Conventions, and includes those Explanatory Decrees issued by the Ministry of Finance for administrative streamlining purposes. The Ministry of Finance will continue to keep its focus on developments of the international taxation trends and topics concerning the protection of the rights of a taxpayer so as to maintain fairness in taxation, protect the rights of taxpayers, and enhance the overall benefits provided by Taiwan’s Income Tax Agreements.
Contact person: Mr. Kevin Pao, Section Chief.
Contact Number: +886-2-23228150