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AMENDED RULES ON TAX EXEMPTIONS FOR ROYALTIES AND TECHNICAL SERVICE REMUNERATION
If a foreign profit-seeking enterprise licenses its patent rights, trademark rights, or various kinds of special licensed rights to a Taiwanese profit-seeking enterprise, the profit-seeking for-eign enterprise may, with the Taiwanese government authorities' approval, apply for the royalties that it receives to be exempted from income tax under the provisions of Subparagraph 21, Paragraph 1, Article 4 of the Income Tax Act (ITA). The same tax exemption may be applied for remuneration received by a foreign profit-seeking enterprise for providing technical services for a major manufacture's construction of a factory building in Taiwan as long as the competent authorities have given the approval.
To make the criteria for the review of such tax-exemption applications consistent, in 1970, by the above provisions of the ITA the Ministry of Economic Affairs issued the Rules for the Review of Applications for Tax Exemption of Royalties and Technical Services Remuneration Received by Foreign Profit-Seeking Enterprises, which in 1995 were renamed the "Rules Gov-erning the Screening of Application for Exemp-tion from Income Tax on Royalty Payments and Technical Services Fees Collected by Foreign Profit-Seeking Enterprises." In view of the changing course of industrial development and the future developmental needs of emerging in-dustries, on 6 July 2007 the Ministry of Finance issued amendments to the above Rules, which took effect immediately, which are summarized below:
．The old Rules required that a contractual agreement prohibit the use of royalties, or remuneration for technical cooperation, as equity. This restriction is now abolished. In other words, royalties for the licensing of patents, trademarks, or know-how to a Tai-wanese profit-seeking enterprise that a foreign profit-seeking enterprise receives in a form other than cash (such as investing the value of the rights provided as equity in the Taiwanese profit-seeking enterprise by an agreement) are now eligible for tax exemption, if they meet the conditions set out in the Rules. (Cash received for royalties was already eligible for tax exemption under the old Rules.) This new provision will be conducive to technical cooperation between foreign and Taiwanese profit-seeking enterprises, which should help raise the technological standards of Taiwan's industry.
．However, under a new provision, if a foreign profit-seeking enterprise assigns patent rights or the ownership of know-how to a Taiwanese profit-seeking enterprise, and the value of the rights or know-how assigned is accepted by the Taiwanese profit-seeking enterprise as payment for a share subscription, then the consideration so received by the foreign profit-seeking enterprise is to be treated as income from property transactions, and is not eligible for tax exemption.
．With regard to the licensing of patent rights, the new Rules provide that if a foreign profit-seeking enterprise licenses patent rights to a Taiwanese manufacturing enterprise or technical service enterprise to be practiced by the Taiwanese profit-seeking enterprise as part of a technical cooperation project, then the royalties received by the foreign licensor are eligible for tax exemption, provided that the licensing arrangement is registered with the Intellectual Property Office (IPO), the case is approved by the Industrial Development Bureau, and the project involves a substantive introduction of technology. The purpose of making tax exemption conditional upon a substantive technology transfer is to exclude instances in which enterprises acquire patent rights merely in order to obviate the risk of infringing on the intellectual property of a foreign profit-seeking enterprise, but do not substantively introduce the associated tech-nology.
．With regard to the licensing of trademark rights, the new Rules provide that if a foreign profit-seeking enterprise licenses its trade-mark to a Taiwanese manufacturing enterprise or a technical service enterprise with which it is engaged in technical cooperation, and such licensing is registered with the IPO, and the licensed trademark is displayed together with a trademark of the Taiwanese licensee on goods, services, or relevant items, then the foreign licensor may apply for the royalties it receives to be exempted from income tax. In other words, tax exemption is available only where a foreign licensor's trademark regis-tered in Taiwan is licensed to a Taiwanese profit-seeking enterprise and is displayed to-gether with the Taiwanese licensor's trade-mark on the relevant goods, services, or items.
．With regard to the licensing of know-how, the new Rules provide that tax exemption is available for royalties received by a foreign profit-seeking enterprise for providing tech-nology to a Taiwanese profit-seeking enterprise for the purposes of manufacturing goods, or providing services, that are listed in the schedule appended to Paragraph 1, Article 5 of the Regulations Governing Incentives for Emerging Strategic Industries Applicable to Manufacturing and Technical Service Industries. Only such royalties qualify as royalty income from "various kinds of special licensed rights" as referred to in Subparagraph 21, Paragraph 1, Article 4 of the ITA, and are thus eligible for tax exemption.
．The new Rules apply only to patent rights, trademark rights, and know-how that are pro-vided to a Taiwanese profit-seeking enterprise for its own use.
．After the new Rules came into force on 6 July 2007, new tax-exemption applications will in general be handled under the new Rules. However, if an agreement for the licensing of patent rights, trademark rights, or know-how, or a technology cooperation agreement, was concluded before 5 July 2008, the foreign profit-seeking enterprise may still opt to apply for tax exemption according to the old Rules.