A series of revision promulgated by Ministry of Finance in Taiwan recently, which were a significant revision since the initial promulgation in 2021. One of the must-see points in this revision is the adoption of “Principle Purpose of Test” under the global attention. Generally speaking,  the Taiwan government will inspect if the enterprises are going to evade or postpone taxation to benefit from the preferential tax convention or other related conventions directly or indirectly.

There has been 33 effective full-scale conventions in Taiwan currently, 17 of which has the similar idea of principle purpose of test. With the abovementioned revised criteria, the enterprises which coveted the benefits of preferential tax from multinational cooperation will be challenged by National Taxation of Taipei.
The primary six points of revision as following:

1. Adoption of “Principle Purpose of Test (PPT)” in the due process articles of Treaty Abuse.
2. Revision of recognition principles of “General Permanent Establishment”.
3. Adoption of “Royalties” application.
4. Revision of “Sole Resident” application
5. Adoption of the definition of “Benefits of International Transport”.
6. Adoption of the application of attribution of the right to tax.

Under the principle purpose of test, in the circumstance of division of contract for business activities or distribution of human resources by oversea enterprises occurred in Taiwan, such act of division shall be examined the necessity of economic substance as well as the reasonable commercial purpose to confirm the applicability of tax convention.

For Instance, Oversea Company A contracted a construction project in Taiwan. Oversea Company A met the requirements of “Construction Permanent Transport” within the period of project. According to the tax convention, Oversea Company A shall pay the related tax in Taiwan. However, if Oversea Company A is approved to divide the contract into two by the contractors in Taiwan, it seems exemptible from the profit-seeking enterprises income in Taiwan physically.

Thus, if the purpose of contract division is recognized for the preferential tax conventions by Revenue Service Office under the condition of principle purpose of test, such profit-seeking enterprises income can be exempted via the preferential tax conventions.

Another noteworthy issue is the revision of recognition principles of “General Permanent Establishment”. The coherence of location of business activities and certain geographical scope will be taken into consideration. That is, the general permanent establishment of oversea enterprises in Taiwan shall be “Fixed and Continuous” for operation and services.

For instance, an agent from a foreign consultant company provides tailor-made service with different clients at the same building in Taiwan and each service without any coherence of commerce (Different clients). So, the building shall not be deemed as a fixed place of business.

Nevertheless, regardless of the issue of a fixed place of business for the foreign consultant company, the other factor that the period of stay is over 183 days shall be considered. Supposed that the agent stay in Taiwan more than 183 days. The concern of “Service Permanent Establishment” will be occurred and may take a bad effect on the applicability of exemption from profit-seeking enterprises income.

Among a variety of tax conventions, regarding to the interests and royalties, it is important to proceed regular transaction. To take the cross-border loan as example, if the mutual setting interests is higher than the market, the excessive amount may not be applicable to the preferential tax conventions, but applicable for the regulations of domestic interest withholding in higher rate.

In accordance with the revised article this time, the expiry date of tax refund is within the date of tax payment to the next five years, but the expiry date of tax refund is as varied as each country as the other references in this article, such as Germany and Taiwan double taxation agreement within 4 years. Each enterprise shall be fully aware of the expiry period to proceed tax refund.

Oversea enterprises in Taiwan are able to refer to the guideline of risk management of tax in Taiwan in the revised article this time.